Last week, the latest chapter of the saga that is Auction 97 unfolded in all its messy, unpredicted and unpredictable glory – Dish and its affiliate DEs surrendered over $3 billion of AWS-3 licenses back to the FCC. Before we get to the selective default, let’s quickly review the bidding to date.
First, Dish took $10 billion in debt and equity to provide 97% of the financing to two new bidding entities that were created through a complex web of identical documents that gave Dish almost total control over any decision that really mattered.
These entities then entered the auction as DEs and were promptly given identical bidding scripts to pursue a highly unconventional bidding scheme with Dish that involved over 4,000 triple and double bids, massive eligibility parking and dubious bid withdrawals.
After the auction, when the veil was lifted and the scheme exposed, no one but Dish and its DEs were surprised to see the status of the DEs challenged and ultimately (and rightfully) rejected by the FCC. Dish professed to be surprised and unprepared for the financial consequences of that decision, even though the aforementioned document web that created the DEs specifically preserved remedies for Dish should the FCC strip the DEs of their preferred status.
That takes us to last week, when a company worth over $27 billion, that has been rumored for months to be raising capital for an aggressive acquisition strategy, apparently could not manage to scrape together either sufficient capital or a proper letter of credit to pay its Auction 97 debt (color me skeptical). Dish instead defaulted on billions of dollars of licenses that it had aggressively – some would say relentlessly – bid on to buy.
The FCC accepted the default consistent with its rules, imposed the mandated 15% penalty and re-auction deficiency measures and declared that, because the post-default debt was timely satisfied and there had been no bad faith conduct, Dish and its entities would not officially fall under the FCC’s former defaulter rules and were fully qualified to participate in future auctions – including (drum roll) the re-auction of the surrendered licenses.
Said another way, the FCC will now effectively store $3 billion of spectrum licenses for some undetermined amount of time for a 15% fee then give Dish the right to buy them back at auction for the same value. And because Dish must cover any deficiency as part of its penalty, it has every incentive to do so. I’m no finance expert but, when you factor in the time value of $3 billion, this doesn’t feel like a just or appropriate result.
Dish’s selective default appears to have been processed consistent with the auction rules, but for those of us who survived the chaos that Dish and its entities introduced into Auction 97 – where they created an environment in which it was exceedingly challenging to make rational bid decisions – understand how wholly frustrating and maddening it is that Dish is now permitted to throw up its hands and say “never mind” to $3 billion of licenses while retaining the right to reacquire them later.
Does anyone believe that if AT&T or Verizon had similarly defaulted that they would have been welcomed back?
Bidders who come to FCC auctions are absolutely entitled to believe that other bidders are participating in good faith, that they are bidding honestly on licenses that they want in earnest and that they are capable of paying for those licenses. Anything less would undermine the integrity of FCC auctions and make bidders wary of deploying their capital there, despite the fact that auctions are one of the only vehicles available for the acquisition of critical spectrum resources.
Dish’s conduct and that of its DEs has already resulted in significant reform of FCC auction rules, including those around the use of DEs and joint bidding constructs. But last week’s default suggests we haven’t gone far enough and perhaps additional reform is needed. Why should an entity be permitted to aggressively bid other earnest bidders out of key markets only to dump those licenses back on the FCC while retaining the right to bid on them again in the future?
And this brings me to my last question – what shade will Dish’s actions throw over the incentive auction? With its complex new format and tricky reserve / non-reserve pools, AT&T has long been concerned about gamesmanship in Auction 1000, particularly because excess reserve-eligible demand after the split will be expressed against the non-reserve. If Dish’s “aggressively bid then dump” strategy is repeated there, the results will be far more disastrous.
If there is one thing we’ve learned the hard way it’s that no matter how much you prepare, every auction contains an element of surprise. The entire Auction 97 book makes us wary of the surprises that await us in Auction 1000. Dish has taken all earnest auction participants to school on how to exploit every rule and every loophole to game an auction. We can only hope that Auction 1000 doesn’t become a master class in the same.