The Law Is On Your Side: Navigating The Sale Of Your Spectrum
Q&A interview with telecoms attorney Steve Coran:
“Now is a really good time to be holding an EBS license because there is a great deal of secondary market activity. It is a great opportunity for you as a licensee to assess what it is that you have, to understand its value and to decide what you want to do. You have a license that is now a major financial asset that may be more valuable to someone else than it is to you.”
What’s the impact of the 2020 FCC rule change?
The FCC rule changes have had an impact on both buyers and sellers, and let me kind of break that down a little bit. So, there is much more interest among license holders in doing something they could never do before which is monetize the value of their license, convert something that was an annuity or a monthly payment and turn it into a big chunk of cash to help make up for deficits caused by COVID or to fund other projects, or just to accelerate the cash for an endowment or other purposes. We have seen a great deal more activity in the market from buyers, sellers, and brokers.
What do you think the upside is for license holders selling their EBS licenses?
The upside is that they will get cash to buy out the balance of their lease. They will get some certain negotiated amount generally in one lump sum and that will have some relationship to the remaining payments on the lease and the terminal value as to would there be an opportunity to renew that lease. This can be very lucrative on the front end. The other thing is that the licensee will no longer have the regulatory burden of maintaining a license and having to renew it because it becomes the buyer’s obligations.
What’s the advantage of using a specialist EBS attorney?
The rules surrounding EBS service are highly specialized. There are only a handful of attorneys who’ve been operating in this universe for decades, with knowledge of the provisions you need to include in deals…and a transaction template that makes transactions go much smoother.
Walk us through the process if a EBS license holder wants to sell their license that’s encumbered by a lease with T-Mobile?
EBS license holders need to decide if they’re interested in selling or if they would rather have the lease cash flow going forward. They should be hiring legal experts to review their lease, to look at things like what’s the termination date, what are the confidentiality provisions, what are the payments, are there any terms that allow us to have discussions with buyers, are there any limits to having discussions with buyers. The next thing would be to have an engineer determine what the licensee’s geographic service area is as well as what the population is in the area. And then the third stage would be to hire somebody, experts to help you determine valuation – that’s about a 2–4-week process to get a good report.
What about the mobile operator’s Right Of First Refusal (ROFR)
So typically leases have a ROFR period where if you get an offer that you want to take, the lessee would typically have a period of time to match that deal. Then if you do decide to sell there will be a certain period of time where you will negotiate the purchase agreement, price probably being the most important thing and the rest of it being sort of risk allocation, risk mitigation, and like terms. You may want to budget a month or so for that, give or take, especially if you have a bureaucracy that requires levels of approval at the educational institution.
What steps should a licensee take to determine license value?
The first thing we like to do is ask, what is it that you have? And the best way to do that because of the way that the spectrum is valued which is on a megahertz per POPs (population) basis, is to figure out what’s the population in your geographic service area. From that and knowing how many megahertz are associated with the license you can then use that to derive various different valuation scenarios. You can say it is worth 5 cents per MHz/POP, or is it worth 10 cents? Or 15 cents? Or is it worth 20 cents? Or you might say if I can’t get a million dollars for this, then I’m not going to go forward, or you may be very analytical and choose to try to extract market value based on all the available evidence that would be kind of a combination of, number one, consulting an engineer, and number two, sort of an industry expert who understands value. Whether it is a consulting firm or a brokerage firm or an investment banking firm, folks can take that raw data around POPs and also the other market data like terrain and like demographics and density and things like that would tend to change the value — the valuation firm will build a matrix for you. The other element to this is, what is the value of your current lease? What are the remaining payments? What’s the terminal value? What are the renewal rights? Ultimately the value will be determined by the market and by what somebody else is willing to pay you for it.
How does an existing lease on an EBS license affect the licensee’s ability to communicate with a potential buyer?
Often times leases have confidentiality permissions, in fact almost 100% of them do. Some of them say that the licensee cannot communicate with any third parties, they can’t even communicate with strategic investors or potential purchasers. Others are a little bit more lenient, but it is really important for folks to understand upfront what they can do and say. The first thing that you are going to want to do is run through your agreement, but you are going to stop yourself because you are going to say wait a minute, there is a confidentiality provision, so I need to make sure that I do this right. If you breach confidentiality that can have serious consequences.
So how do license holders communicate with a Buyer without breaking the terms of a typical lease?
Sometimes they can be recipients of unsolicited offers and that may create an obligation for them to share the offer with their lessee. In that case you would begin a dialogue with the operator about the potential sale of the license. Also, you need to review the provisions carefully because there may be a prohibition on the transfer of the lease, but not necessarily prohibiting sale of the license. These are really important terms to understand when you are reviewing the lease.
Once there is a deal in place to sell the license, what is the regulatory process and how long will it take?
The process is to file an application with the FCC to assign the license, it’s an electronic form. It requires a brief description of the transaction and answers to a bunch of basic questions that would go on a public notice and after a period of time it would be grantable by the FCC. How quickly they do that is dependent on what the FCC staff sees in their review.
Explain how the lessee is affected or not affected by an EBS license sale?
Generally, they shouldn’t care who they are sending the check to, whether it is a college or university or whether it is some third party that bought them out. There may be some resistance because if the buyer is a company that is buying up a lot of licenses that may give them more clout in negotiations, they may be suspicious of something like that.
How do you see spectrum values changing over the next 5-10 years?
Generally over time, spectrum values go up but, in a long-time frame there are peaks and troughs. We see dips when there is a glut of spectrum on the market, also when you have few competitors on the secondary market for spectrum. Sometimes you see peaks before auctions where companies decide that they want to get the sure thing buying spectrum at a certain price rather than competing against their rivals in the spectrum auction. Over time you are going to see spectrum values increase.
What unique expertise & experience does Lerman Senter provide to its EBS spectrum clients?
Lerman Senter has been around for almost 40 years. We have a wide range of specialties – everything from broadband, utilities, broadcast, satellite, and privacy. We do a lot of transactional work and have deep experience in working with not just EBS licensees but also operators, so we understand the perspective of both. We can help guide folks through that process and anticipate how a transaction might unfold. We are really good people; I cannot say that enough in that we all get along and enjoy working with each other. We collaborate seamlessly on projects in a way that gets good results and do work-arounds – as in if you can’t go under it, you need to go around it. This has allowed us to find a lot of creative solutions to problems and structure transactions to ensure that they get done.