Philip Falcone has morphed from billionaire hedge fund manager to telecom tycoon.
On Monday, the founder of Harbinger Capital Partners completed the purchase of SkyTerra Communications, a 14 year-old global wireless communications company, for $262.5 million in cash. After taking into account SkyTerra’s outstanding debt and securities held by Harbinger’s affiliates, the transaction represents a total enterprise value of about $1.849 billion, the companies said.
The outright purchase of the company goes well beyond the typical strategy of making a strong bet on a single industry. In fact, New York City-based Harbinger, which ran about $8 billion at year-end, has a number of big bets on telecom throughout the world that it hopes will make Falcone the King of 4-G.
According to a recent filing by the Federal Communication Commission, Harbinger, through its Master Fund and Special Situations Fund, holds about 29 percent of the outstanding voting shares of Inmarsat plc and holds convertible debt instruments issued by subsidiaries of Inmarsat. Harbinger also holds interests in other communications companies, including Leap Wireless International, Sprint Nextel, Augere Holdings (Netherlands) B.V. and Satélites Mexicanos Sa de CV (SatMex).
In addition, HCP Satmex (Dutch) B.V., a Dutch private limited liability company that is a wholly-owned subsidiary of the Master Fund, holds about a 17.5 percent equity interest and 9.5 percent voting interest in SatMex.
In a press release last Friday after the FC approved its purchase, Harbinger said it plans to use SkyTerra’s spectrum in concert with Harbinger’s other investments in radio frequencies to implement an open next generation terrestrial network and mobile satellite system.
In noted that in releasing the National Broadband Plan, the FCC stated that one of its important goals was to “design policies to ensure robust competition and, as a result, maximize consumer welfare, innovation and investment.”
“This announcement by the FCC sets the stage for the launch of our business plan whose objective is nothing less than to revolutionize how Americans use and experience wireless communications in the 21st century,” Falcone said in a statement.
Falcone won’t comment further on his acquisition, however, according to a letter sent by Harbinger’s attorney to the FCC, the firm plans to develop a nationwide terrestrial broadband mobile 4G LTE (Long Term Evolution) network, which will provide wireless data on a nationwide basis. The network will be operated on an open access basis, said the letter from Goldberg, Godles, Wiener & Wright.
According to a report in dailyfinance.com, Verizon and AT&T are also investing heavily in the LTE format. Sprint and Clearwire are betting on a competing-speed format called WiMax. Remember, Harbinger has a big stake in Sprint, which serves as something of a hedge.
There are many skeptics out there. They point to the huge costs Falcone will need to incur. Estimates begin at $4 billion and exceed $6 billion to build out a terrestrial network and build and launch satellites. Falcone is said to be seeking partners or investors in his plan and some reports say he is likely to partner up with T-Mobile.
To me, it sounds like he is undertaking a classic private equity strategy. He is building this ambitious telecom platform, and will no doubt add partners and niche companies along the way. He already has those sizable strategic investments in several foreign companies.
And, don’t forget he already has a day job, running $8 billion in hedge funds.
So, when he gets to a critical investment point, probably in a few years, he will likely do the honorable PE thing — cash out and sell SkyTerra and his wireless network to a much larger company, probably another large private equity firm, reaping a huge windfall for his funds, and of course, for himself.
As with his early bets several years ago that the housing market would blow up, Falcone will be hailed for his prescience.
Stephen Taub, who has covered the hedge fund industry for 30 years, is a contributing editor to Institutional Investor and Absolute Return-Alpha magazines and former editor of Financial World magazine.
