Nextwave Takes It on the Chin

NextWave Telecom Inc.'s days may be numbered.

Last Thursday, the Second Circuit Court of Appeals ruled that the U.S. Bankruptcy Court did not have jurisdiction over the company's wireless licenses. In effect, the decision granted the Federal Communications Commission authority to repossess the spectrum and re-auction it to the highest bidder in July.

Following a favorable decision by the Bankruptcy Court two weeks ago, NextWave hoped to ride out the tide of judicial goodwill. Early last week NextWave had asked the Second Circuit to reconsider its earlier decision denying a 78% reduction on the price of the company's wireless licenses. That motion was denied.

In a statement released Thursday evening, NextWave said it was "obviously disappointed" with the Court's decision.

NextWave's latest move came just days after the Bankruptcy Court handed the company a victory, at least temporarily, by deciding that the FCC overstepped its legal boundaries in revoking the spectrum licenses while the company was under Chapter 11 protection.

Following a Second Circuit decision granting the FCC exclusive jurisdiction over the licenses, the FCC revoked the company's licenses, arguing that it was acting in a regulatory capacity, not as a creditor. The Bankruptcy Court declared the FCC's actions null and void and criticized the agency for undermining the bankruptcy code.

The FCC did not deliver the PCS licenses auctioned to NextWave in 1996 until 1997, when their market value dropped from $4.7 billion to $1.02 billion. A lower court earlier had ruled that the company owed the agency only that amount. In December, the Second Circuit reversed the lower court's decision.

"The chances of getting what they want are very slim. Three judges on the Second Circuit already ruled against them," said one FCC official. "But, they might as well play out their hand."

Company officials could not be reached for comment.

Investors have been slow to react to any developments in this legal battle. As one telecom analyst noted, some market players do not understand either the underlying legal issues or their ramifications. But, shares of Nextel's stock surged 5 1/4 on the news, to close at 129 15/16 on Thursday.

In its petition the company argued that the Second Circuit panel "overlooked the bankruptcy-jurisdiction statute, which expressly grants jurisdiction notwithstanding' other jurisdictional statutes...The licenses are property of NextWave's bankruptcy estate and this subject to bankruptcy jurisdiction."

The company's recent petition also requested the full Court of Appeals of the Second Circuit to hear the case if the three-judge panel does not change its decision.

NextWave is expected to appeal the negative ruling, and the case may travel all the way to the U.S. Supreme Court.

After revoking NextWave's licenses, the FCC announced it would re-auction the spectrum late in July. Given the latest decision, the auction will probably go forward without a hitch.

NextWave holds C- and F-block PCS licenses designated as "Entrepreneur Block Spectrum" by the FCC. Bidding is limited to companies whose assets do not exceed $500 million and whose revenues did not exceed $125 during the previous two years.

The FCC, however, is considering changing the bidding rules to include bigger wireless players. Nextel Communications and Baby Bell SBC Communications have already filed requests to waive the eligibility requirements for the July auction.

"The FCC's manhood has been challenged. They will win in the long run," said one industry source.