Hedge Fund Manager Philip Falcone Takes On Big Telecom

Telecommunications. Into this world — where terms such as megahertz, 3G, 4G and L-Band actually make sense — an unlikely but possible game changer has stepped: hedge fund manager Philip Falcone.

The founder of Harbinger Capital Partners — who you may remember from his November 2008 appearance before congress when, sitting next to the legendary financier George Soros at a hearing on hedge funds and the financial markets, he testified about his “hard scrabble” childhood growing up in rural Chisholm, Minnesota — is launching a bold assault on the established telecom players.

Last September Falcone, a distressed debt specialist who presumably became familiar with the telecom industry while trading its debt during the dot-com crash that sparked a rally in distressed investing from 2001 to 2003, announced that Harbinger was acquiring SkyTerra Communications, a Reston, Virginia, company that was a leading developer and supplier of mobile satellite communication services. The all-cash deal, in which Harbinger paid $262.5 million, closed in March. And the world (or at least the small corner of the world that cares about these things) wondered, What does Falcone want with a telecom company?

It turns out there was a master plan. SkyTerra had something Falcone wanted: 28 megahertz of L-Band nationwide ubiquitous spectrum (basically that is high-quality space, or spectrum, on the information superhighway that the government owns and auctions off to organizations like telecom companies). In addition to the 28 megahertz he got through SkyTerra, Falcone went on to buy and lease more space, giving him a total of 59 megahertz of spectrum in the U.S. In March he got Federal Communications Commission approval to use these megahertz to offer next generation, or 4G, broadband (kind of like zoning for real estate).

Late last month Falcone announced the creation of a new firm — LightSquared. Based in SkyTerra’s old Virginia location, LightSquared has all of this 59 megahertz of spectrum (again, think of this like attractive beach front real estate that people might want to lease, or at least they would have back when we had an economy). And the plan is to sell — or rent out — these megahertz wholesale, making them available to anyone from a gadget maker like Apple or Amazon to major phone providers like AT&T or T-Mobile.

Why is this exciting? Remember when Apple launched the first iPhone. There was a lot of discussion about whether linking up with a single network provider, in its case AT&T, would hurt Apple. The issue also came to light in July when Google discontinued its smart phone, Nexus One, which the search giant sold unconnected to a major network provider. Well in a Phil Falcone world, Google and Apple would not have to bother with a network provider; they can bypass the middleman and rent capacity on LightSquared’s network. And say AT&T has spotty cell phone reception in, I don’t know, Chisholm, Minnesota, it could lease spectrum from Falcone’s network to cover the gap. (I like to think that Falcone came up with this idea while back visiting the folks in Chisholm and losing coverage for his Blackberry.)

“Our business model is unique,” says Sanjiv Ahuja, CEO of LightSquared and the former CEO of French based telecom giant Orange Group. “It enables products and services in a completely neutral way. We will cooperate with everybody in the industry; either supplement their capacity or augment their natural coverage.”

LightSquared’s network will consist of both satellite and terrestrial broadband coverage. It has one satellite ready to launch in December and expects to launch a second in 2011. But the real effort is on the terrestrial side. LightSquared plans to build 40,000 cellular towers around the U.S. over the next few years, with plans to cover 92 percent of the population by 2015. It has teamed up with Nokia Siemens Networks, which will build the towers.

LightSquared will provide the money. And it is going to need a lot of it. Philip Cusick, telecom analyst with the Australian bank Macquarie in New York, estimates that Falcone will need more than $5 billion in financing to fund the complete buildout, in addition to what Harbinger has contributed already.

Harbinger itself has put up $2.9 billion, a figure that includes that spectrum I was talking about earlier. In July, LightSquared announced it has received a further $1.75 billion in additional debt and equity financing, though the company is being cagey about the source of that additional money. “It sounds like this is committed but undrawn financing and we still don’t know the backers,” Cusick says. According to Ahuja, LightSquared’s prospective partners are not worried about having one hedge fund put up such a large chunk of the capital. They have, he says, “no concerns about counterparty risk.“

If this all comes together, Falcone could go from being just another hedge fund manager, albeit a highly successful one, to the next king of broadband.