Who says there’s no money in valuation? A recent bankruptcy case raises eyebrows for a number of reasons, not the least of which is the $1.25 million fee paid to a valuation expert for a short-term assignment.
Spectrum of interests: LightSquared, which is in Chapter 11 bankruptcy, owns several satellites and licenses to use a spectrum on the mobile satellite service band, issued by the Federal Communications Commission (FCC). Charles Ergen owns DISH, which is LightSquared’s main competitor. Through a special-purpose entity, known as SPSO, he also acquired nearly $1 billion of the outstanding $1.5 billion in LightSquared prepetition secured debt. The way in which SPSO came to hold the claims fueled litigation where the debtors alleged inequitable conduct, fraud, and tortious interference with prospective economic advantage. Earlier this year, the Bankruptcy Court found that Ergen violated the spirit of a credit agreement when he purchased his debt. The court ruled that some of his debt would be paid after other claims against LightSquared.
Given the connection among SPSO, Ergen, and DISH, the debtors developed a reorganization plan that tried to separate the SPSO claim from other first-lien lender claims. Not surprisingly, SPSO opposed the plan. The debtors argued that, even if the court recognized SPSO’s rejection vote, it should confirm the plan. Further, the treatment of SPSO’s claim was informed by legitimate business reasons, and the plan was fair and equitable because it ensured that SPSO received the “indubitable equivalent” of its claim. A valuation of LightSquared’s spectrum and satellite assets showed that there was sufficient collateral to protect the full principal value of SPSO’s claim, the debtors maintained. The debtors’ valuation expert had “stellar” credentials. His firm had a telecommunications practice, and he had worked on several spectrum deals. He performed extensive research and analysis over the almost two years in which he served as LightSquared's financial advisor. He also showed that his valuation aligned with one Ergen and an outside financial advisor had done in 2013 when Ergen contemplated a low-band acquisition bid for LightSquared’s assets. Critically, the debtor expert’s valuation was premised on the FCC’s approval of LightSquared’s application for augmented spectrum rights.
‘Unimpressive piece of work’: Ergen hired an expert to disprove the debtors’ claim. This expert had three weeks to submit his report and was paid $1.25 million. He had no industry expertise. At his deposition, he admitted he did not become aware of Ergen’s earlier valuations until a day after completing his report. The court called his report “an unimpressive piece of work.” His lack of experience valuing satellites and spectrum was noteworthy, the court said. He applied faulty and arbitrary assumptions in valuing the assets. Although he was not an FCC expert, he reduced the value of LightSquared's spectrum based on his risk assessment. “Simply put, his methodology is all over the place,” the court added. “Paid $1.25 million for his work, [he] delivered a superficial analysis that was not even informed by a review of [Ergen’s valuations.]” But, while the court praised the debtors’ expert, it still found his valuation unreliable because it assumed FCC approval where such an outcome was anything but certain. Ultimately, the court refused to confirm the debtors’ plan. The fight continues.
Takeaway: Don’t take an assignment—however lucrative—for which you lack the necessary expertise. A bad review from the court travels fast and leaves a lasting stain on your reputation.
Find an expanded discussion of In re: LightSquared Inc., 2014 Bankr. LEXIS 2984 (July 11, 2014) in the October issue of Business Valuation Update; the court’s opinion will be available soon at BVLaw.