Daniel Riker, Pocket's chief executive officer, calls NatTel's offer questionable. After all, the only significant money NatTel has is a promise of up to $25 million from a New York financial firm. Pocket, a personal communications services company, filed for Chapter 11 protection in March and hopes to emerge from bankruptcy through its own reorganization plan. But the decision to accept or deny either companies' plan lies with a U.S. Bankruptcy Court in Baltimore.
Pocket was one of several dozen entrepreneurial companies that won licenses to provide PCS services around the country through a Federal Communications Commission auction that ended after five months last May 1996. Shortly after the auction ended, the public market for telecommunication stocks fell apart and most auction winners lost their primary source of fund raising.
Unable to make payments to the FCC and to creditors who were helping build out networks, Pocket sought protection. The company still owes $1.3 billion for licenses in 43 towns and cities, including Chicago, Detroit, Dallas and St. Louis.
While Pocket was hunting for financiers to carry it out of bankruptcy, along came NatTel, a company only on paper, with a different plan.
NatTel filed an emergency motion in the bankruptcy court asking the court to allow NatTel to buy Pocket by assuming the $1.3 billion in FCC debt and giving Pocket's unsecured creditors stock in NatTel. Pocket filed its own reorganization plan with the court earlier that same week.
The court has not responded to either offer. But once the creditors and court examine both plans, they will decide on an option. Those familiar with the case expect that to happen in the next 30 to 40 days.
"I don't know what he's trying to do," Riker said, referring to NatTel's CEO, Jack Robinson. "We have an investor and a reorganization plan that will get us out of bankruptcy."
But Robinson said he thinks he has "a pretty good shot at [buying Pocket]. ... I wouldn't be getting into this if I didn't think I could get anything out of it."
NatTel is merely a shell of a company with no operations. Robinson, a nonpracticing bankruptcy attorney, founded the company in 1994 with Daniel Carpenter, NatTel's chairman and also an attorney. Aside from personal investments, Robinson and Carpenter intend to tap public markets, private investors and vendors for financing the rest of Pocket's debt.
Robinson bid in the FCC's C-block auction, as last year's showdown was regarded, and won only one license, American Samoa. The FCC subsequently took that license away, claiming that Robinson defaulted on a scheduled payment. Robinson insists that he did not default. He said that the FCC simply did not grant him a waiver, as it had with several other licensees.
"I'm waiting for [Robinson] to have a real company," said consultant Taylor Simmons of Washington-based Simmons Associates, a PCS consulting firm.
The only funding Robinson has is a promise of up to $25 million from White River Partners, a subsidiary of White River Corp. in White Plains, N.Y. He said he currently has no other plans for additional financing. But that doesn't scare him.
"We'll do what we have to when the time comes," he said. "As a matter of law, we just have to prove to the court that we're viable. We don't have to prove that we will have other financing down the road."
That is not the case, said one bankruptcy attorney who asked to remain nameless. "A bankruptcy judge wants some assurance that you won't end up right back in bankruptcy," he said.
To buy Pocket, NatTel needs much more significant funds. In addition to the $1.3 billion to pay off the licenses, each of those 43 markets needs to be built out, Riker said. Switching stations, antennas, retail operations, network and calling centers all have to be built, which adds billions more to the price.
After winning its licenses last year, Pocket quickly ramped up its staff to 55 employees and started building out its networks. But when the company started running low on money and missing payments to creditors, it had no choice but to reorganize. It has since pared back its staff to 15.
THE FCC PLAN
The debacle over the C-block auction started when the FCC decided to reserve a block of wireless communications spectrum for small companies.
PCS dawned as a next-generation cellular product before cellular even rose to stardom. With a digital service that offered anti-eavesdropping security, voice mail and paging, PCS was sure to take off. Obvious players, like AT&T, Sprint, MCI and Bell Atlantic, bought their way into the industry with money and muscle.
But the FCC wanted to give entrepreneurs a fair shot at the same market. Through the C-block auction, the FCC was to give out a license in each city and town to a nongiant company. As an advantage, the small companies could pay for their licenses over a period of years and get a discount from the actual bid price.
C-block bidders flocked from all over, but they weren't as small as the FCC anticipated and their bids weren't so small either. Over five months of bidding, the small companies, which were backed through minority stakes from such powerhouses as Motorola and Sony, rang up more than $10 billion in debt to the FCC. They paid more for their licenses than did AT&T and the other giants.
Pocket was the second-largest bidder behind NextWave Telecom Inc. of San Diego, an entrepreneurial company that bought more than $4 billion in licenses to blanket almost half of the United States with PCS service.
However, because the bids were so high, and because the stock market had lost interest in telecom companies, the C-block bidders started defaulting on payments to the FCC almost immediately after the auction ended.
This left the FCC in a predicament. If the government agency did not grant some leniency on the debt owed, the C-block winners would not pay and the government would not get its money. But if the FCC allowed the winners leniency, those who did not get high bids in the auction would rightfully complain.
"The effort of the government to create a special class for small businesses didn't quite work out," Simmons said. "Exceedingly generous financing was its biggest mistake."
The FCC finally settled the issue last month by giving the winners four options. They can either:
- Keep their licenses and continue making payments;
- Return half of their spectrum for each license for reauction and pay only half of their debt;
- Return all of their licenses and have any outstanding debt forgiven; or
- Keep the licenses they want and pay them off without discount, while giving the rest back for reauction.
The FCC is giving the licensees until January to decide on an option. The next payment on licenses is due in March.
An FCC source on background said that the commission is not sure how many licenses will come back for reauction or when the reauction will take place.
THE POCKET PLAN
In Pocket's reorganization plan that was submitted to the bankruptcy court Sept. 29, the company said that it intends to take the FCC's last option and only keep licenses in New Orleans and Las Vegas. Licenses for all of the other cities would go back to the FCC.
"Our investors are not very happy, to say the least," Riker said. "All the equity we had is gone. And our creditors won't recover everything either."
To cover the cost of paying for the licenses it is keeping, Pocket got a $70 million investment from Jefferson Acquisition Group earlier this month, Riker said. Initial investments (before the auction) in the company came from Westinghouse and a group of local communications consultants and Asian investors. Along with possible vendor financing, Pocket could get its PCS networks in New Orleans and Las Vegas operational by the fourth quarter of 1998, Riker said.
Still, Robinson has his own agenda with NatTel and Pocket.
If the bankruptcy court accepts NatTel's proposition, Robinson said that he will drop an antitrust lawsuit his company filed against Pocket after the auction last year.
In the lawsuit, NatTel claims that Pocket colluded in the auction by working with an independent consultant that had access to NatTel's confidential business plan. That suit seeks $1.1 billion in damages.
Robinson said that he would also drop a petition he filed last year with the FCC to deny Pocket its licenses. In that petition, NatTel claims that Pocket violated certain auction rules. NatTel did not file similar petitions against any other players in the auction.