Nextel/NextWave Fight Could Impact PCS Sector

Regardless of which company comes out on top, high yield investors are keeping close tabs on the battle for PCS licenses between Nextel Communications and NextWave Personal Communications.

Not only might the outcome parlay into billions of dollars of future financing, but it also could change the way the high yield market looks at wireless licenses as collateral, according to one telecom analyst.

A decision is several weeks away, but at stake is a block of PCS licenses auctioned off by the Federal Communications Commission representing 110 million subscribers.

"Who owns them is the issue currently in contention," said one source familiar with the situation. "The FCC believes they, or rather the people, own the spectrum, and they're just licensing it. Everyone has a hand in it."

PCS and cellular, the two primary wireless communications systems, require government licenses for companies to operate in specific markets. In the event of bankruptcy, spectrum licenses are sometimes viewed as valuable assets that can potentially be used as collateral.

Gary Jacobi, telecom analyst at Deutsche Banc Alex. Brown, said the Nextel-NextWave dispute raises the question of what those licenses are worth and whether the bankruptcy courts can place a new value on them.

In May 1996, NextWave won the right to apply for those licenses by bidding $4.7 billion. About a year after winning the bid, after NextWave had already paid out nearly half a billion dollars to hold the licenses, the market for radio spectrum collapsed. Eight of the bidders at the C-block auction filed for bankruptcy. NextWave Personal Communications filed for Chapter 11 bankruptcy in June 1998, and its parent, NextWave Telecom, followed suit six months later.

NextWave argued that it should pay only the fair market value at the time, instead of the previous year's value - before the market plummeted. The court agreed to value the spectrum at slightly over $1 billion.

Armed with $700 million in new equity from investors, NextWave said it could soon emerge from bankruptcy with an improved business plan, and reclaim the spectrum at the price set by the court. (Though the spectrum wasn't worth as much, NextWave felt it still had value.)

The announcement drew fire from the FCC, which claimed the courts had no right to set new values for assets the FCC had auctioned off. The FCC then appealed the court's decision and attempted to get legislation passed through Congress to reclaim the licenses.

Meanwhile, Nextel has reportedly offered up to $6 billion for the spectrum. Other sources report Nextel has offered only $2.1 billion for the licenses.

The FCC did not return calls seeking comment.

Nextel has raised $9.8 billion of capital this month, including a $2 billion high yield offering two weeks ago. While the debt is to be used primarily for refinancing, the remaining cash is to be used for capital expenditures on the domestic and international front, as well as for potential acquisitions.

One company source suggested Nextel was over-funded rather dramatically and, consequently, has the latitude for various projects, although the source would not elaborate.