Phil Falcone's LightSquared: Boom or Bust?

By Insider Monkey Staff

Phil Falcone’s Harbinger Capital Partners became famous in 2007 when Falcone became famous for betting against subprime mortgages. The investments, however unpopular, made Harbinger $11 billion in 2007. That year, Harbinger Capital returned 116%.

By mid 2008, when the crash of the financial markets came along, things became rough for Harbinger. The fund lost half its value during the rest of 2008. Harbinger rebounded in 2009, returning 42%, which is better than many funds did that year. The next year, 2010, the scales for Harbinger tipped the other way and the fund lost 12%.

From there, things went downhill for Harbinger Capital. The fund had had $26 billion in assets under management at its peak. It fell to roughly $7 billion in assets by the end of the fourth quarter. The decrease is owing in large part to poor performance and high redemptions stemming from Falcone’s risky and illiquid bet in wireless venture LightSquared. Not that the redemptions have done much good. “Since the spring, investors in certain of his funds have been getting pieces of paper entitling them to invest in LightSquared, rather than their money back,” writes the Deal.

Now nobody is getting out, except some of Harbinger’s biggest backers, like Goldman Sachs GS and Blackstone Group BX. “When those powerful institutions asked for their money back last year after questions were raised about a $113 million personal loan Falcone took from his special situations fund while investors in general couldn’t get their money out, they were permitted to cash out, according to sources familiar with the situation,” the Deal says. Falcone has since repaid the loan. But, he has come under fire for his unconditional support of the LightSquared venture.

However, realistically, Falcone may be on to something. LightSquared has developed a technology which, if it receives government approval, would allow for the creation of a nationwide 4G system that uses the country’s global positioning systems (GPS) – the same thing that makes GPS work –to provide wireless voice and data services across the country.

The $6.50 billion market cap Sprint Nextel Corp S already has a standing offer in place for when (if) LightSquared ever gets the necessary approval – the deal is worth $13.5 billion, spread across 15 years – and no wonder.

The ability to offer consumers better coverage would allow Sprint to compete more readily with competitors like the $178.31 billion market cap AT&T (T) and the $106.99 billion market cap Verizon Communications VZ – that is if LightSquared gets the approval it needs.

It would also allow Sprint to firmly move beyond such smaller competitors as the $3.90 billion US Cellular USM and the $3.03 billion market cap Telephone and Data Systems TDS. David Einhorn and Rob Citrone had large positions in Sprint at the end of September.

Right now, LightSquared’s fate is uncertain. Senators Grassley (R-Iowa) and Roberts (R-Kan.) have spoken out openly against LightSquared’s proposed network, saying that the technology would interfere with the nation’s defense systems. Harbinger has spent millions in lobbying efforts trying to gain the much-needed approval, but to-date those efforts have been unsuccessful.

In mid-January, LightSquared suffered another blow after nine federal agencies unanimously recommended an end to its plan to institute a nationwide 4G system. “Based upon this testing and analysis, there appear to be no practical solutions or mitigations that would permit the LightSquared broadband service, as proposed, to operate within the next few months or years without significantly interfering with GPS,” the Space-Based Positioning, Navigation and Timing National Executive Committee wrote to the Commerce Dept.

LightSquared disagrees, calling the tests “biased” and “rigged,” and blamed the poor results “on devices that were old or out of production.” The final decision falls to the Federal Communications Commission. Until then, the question as to whether LightSquared is a boom or bust is up in the air.