Philip Falcone’s LightSquared Inc. proposed a bankruptcy plan that would punish Dish Network Corp. (DISH:US) Chairman Charles Ergen, a creditor and onetime bidder for the wireless company, if he doesn’t go along.
The alternative, endorsing the plan, wouldn’t be much better, Ergen’s investment fund said in a Feb. 21 objection.
U.S. Bankruptcy Judge Shelley Chapman in Manhattan is scheduled to consider today whether to approve LightSquared’s disclosure statement, which lays out the terms of the reorganization proposal, on which creditors can then vote.
A “no” vote from Ergen’s SP Special Opportunities LLP, which holds more than $1 billion in LightSquared debt, would put his fund far behind other creditors in getting paid.
“It is turning into a blood feud,” between Falcone, 51, and Ergen, 60, said Erik Gordon, a professor at the University of Michigan’s business and law schools. He called the proposed treatment of Ergen’s debt “overtly coercive.”
The plan would make Reston, Virginia-based LightSquared a stand-alone company valued at $7.7 billion, with Falcone’s investment fund, Harbinger Capital Partners LLC, keeping an equity stake. It replaces earlier proposals to break up the company, which owns wireless spectrum that hasn’t been approved by regulators for use, by selling its most valuable airwaves to a fund owned by Ergen.
LightSquared filed for bankruptcy in May 2012 after the Federal Communications Commission blocked its service, saying it might interfere with global-positioning-system navigation equipment. The current plan doesn’t hinge on obtaining FCC permission right away. Instead, it anticipates gaining the first approvals by the end of 2015.
David Friedman, a lawyer for Harbinger, didn’t immediately return a call seeking comment on the Ergen fund’s objection. Rachel Strickland, a lawyer for Ergen, didn’t immediately return a call seeking comment on it.
A purchase by Ergen of LightSquared’s wireless spectrum would complement his satellite-TV businesses while allowing him to repay himself for the LightSquared debt he bought through his SP Special Opportunities fund.
Under the new plan, if SPSO votes in favor, its $1.06 billion claim will be considered secured, following first-and second-lien claims on the company’s assets. If SPSO votes no, the claim would be deemed unsecured, placing it even further back in line to be repaid.
SPSO called both options “worthless” because at best its claim would still come in behind $2.2 billion or even $3.2 billion in other debt. The bankruptcy code’s rules bar LightSquared from singling out SPSO for different treatment, and soliciting creditors’ votes on this plan “would constitute a waste of the meager remaining resources” of the bankruptcy estate, SPSO said. When a company solicits votes on reorganization plan, the cost is born by the bankruptcy estate.
The fund also said that the plan presents the court with the choice of approving a reorganization that would wipe out Ergen’s debt, or see the company hit a wall, as the only way it seems to be able to reorganize is by cutting out $1 billion in debt.
LightSquared and Harbinger sued Ergen last year, saying SPSO improperly bought debt in LightSquared before L-Band Acquisition LLC, a separate fund run by Ergen, offered $2.22 billion for the company’s airwaves.
The purchases were improper because Ergen was acting on behalf of Englewood, Colorado-based Dish, and competitors were prohibited from owning the debt, according to the lawsuit.
LightSquared accused Ergen of building a “blocking position” to influence the bankruptcy.
The company said in the disclosure statement that Ergen paid a 30 percent premium to what he believed the debt was worth because he saw value in getting control of the case and buying the airwaves.
Ergen has said that he was acting personally, not for Dish, in buying the debt and that he made no “false representations” about his investment. L-Band later withdrew its bid for the assets.
Sending SPSO to the back of the line without first getting a ruling that it improperly accumulated LightSquared debt renders the entire plan improper under the bankruptcy code, the fund said in its objection.
“LightSquared has premised its entire plan on SPSO’s being guilty until proven innocent,” SPSO said.
Parties including Fortress Investment Group LLC (FIG:US) would supply $1.65 billion in debtor-in-possession financing plus $1 billion in exit financing under the plan.
Votes are to be submitted by March 3 and any final objections are due March 10, according to court papers. A confirmation hearing has been proposed for March 17.
The reorganization, if effective by Oct. 31, will create a company valued at $6.2 billion to $9.1 billion, with a midpoint of $7.7 billion, LightSquared said in court papers.
The estimate assumes LightSquared will get FCC approval effective Dec. 31, 2015, for some airwaves for terrestrial mobile broadband services, and in about seven years get approval for additional frequencies. LightSquared said it came up with those targets after consulting with regulatory experts.
The case is In re LightSquared Inc., 12-bk-12080, U.S. Bankruptcy Court, Southern District of New York (Manhattan).
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