Hedge Fund Billionaire Philip Falcone's Plan to Take on Verizon and AT&T

Philip Falcone, Harbinger Capital Partners, who's launching a 4G telecom network
Philip Falcone, Harbinger Capital Partners, who's launching a 4G telecom network

How big is the financial opportunity in next-generation wireless broadband access? Consider this.

A prominent New York hedge fund billionaire intends to take on several of the country's biggest telecoms by building a massive 4G wireless network that one analyst has called "breathtaking in its ambition."

On Monday, Harbinger Capital Partners, run by Philip Falcone, and SkyTerra announced a merger -- a take-private deal with an enterprise value of nearly $2 billion, according to the companies. The FCC formally approved the deal last Friday.

Harbinger issued a statement saying it's building a new network that will cover most of the country by 2015, with tests rolling out in Denver and Phoenix next year. Falcone aims to use spectrum owned by his satellite investments -- including SkyTerra and TerraStar -- to build a wholesale data network "that could be resold by anyone wanting to offer 4G services to their customers, such as retailers or laptop/device manufacturers," according to Kevin Fitchard at Connected Planet.

Harbinger is looking at build-out costs of as much as $4 billion or more, according to industry estimates. Falcone plans to use the LTE (for Long Term Evolution) format, which Verizon (VZ) and AT&T (T) have also invested heavily in. Sprint (S) and Clearwire (CLWR) are rolling out a competing high-speed format, known as WiMax -- and Harbinger has apparently taken new big positions in Sprint.

In effect, Falcone -- who grew up in Minnesota and was a star hockey player in college -- appears to be hedging the two formats against each other -- but like many observers, he clearly thinks LTE has more potential and will ultimately supplant WiMax. Harbinger said its "objective is nothing less than to revolutionize how Americans use and experience wireless communications in the 21st century."

America's 163rd-Richest Person

It all sounds pretty grandiose, but Falcone is known in New York financial circles for his prescient early bet that the U.S. housing market would collapse. In 2007, he returned 125% to investors. Harbinger as an estimated $20 billion under management. Falcone recently purchased former Penthouse publisher Bob Guccione's $49 million Upper East Side townhouse. And Falcone and his wife have become quasi-big shots on the New York philanthropic scene.

At the end of 2008, Forbes listed him as the 163rd-richest American, with a net worth of $2.5 billion. Harbinger also leveraged a 20% stake in The New York Times Co. (NYT) into two seats on the board of the company that controls America's most famous newspaper. He also owns 40% of the Minnesota Wild hockey team.

And now, he's making a huge bet on the future of wireless broadband.

"Confidence to Make Investments"

Harbinger's statement came on the same day the company received approval from the Federal Communications Commission to take control of SkyTerra, a wireless satellite company. Harbinger said the FCC approval means it "will be able to use SkyTerra's spectrum in concert with Harbinger's other investments in radio frequencies to implement an open next generation terrestrial network and mobile satellite system."

On Monday, Harbinger and SkyTerra formally announced the deal, saying "the take-private transaction was accomplished via merger for approximately $262.5 million in cash." SkyTerra added: "the transaction represents a total enterprise value of approximately $1.849 billion."

The commission's approval appears to be part of its bigger push to spur competition in the market for next-generation broadband services. "The FCC's broadband policies have given us the confidence to make a series of investments that will bring new competition and innovation to all Americans," Falcone said. "This announcement by the FCC sets the stage for the launch of our business plan."

Stacey Higginbotham, the veteran telecom reporter who knows this stuff as well as anyone, breaks down some key aspects of the story over at GigaOm:

The Harbinger network could help ensure competition among the major wireless carriers thanks to the conditions the FCC has placed on the spectrum that the private equity firm plans to use as part an agreement to let Harbinger take control of SkyTerra - namely that SkyTerra has to be a wholesaler, and that traffic from the largest and second-largest wireless carriers in the U.S. cannot comprise more than 25 percent of the traffic over the SkyTerra/Harbinger network. This means AT&T and Verizon could not buy up huge chunks of the network or spectrum to keep others off of it.

Harbinger's plans to build out a mobile broadband network stretch all the way back to a 2003 order allowing satellite companies owning spectrum in the L and S bands to build out terrestrial networks in conjunction with their satellite networks. The idea was to offer an alternative to the cellular carriers, but the stringent satellite requirement (that the cell companies lobbied hard for) has proved tough. It's expensive to launch and build satellites (plus build out a terrestrial network), and any phones working on such a system are pretty clunky. Another strike is unless the satellite companies found a willing terrestrial partner, the initial satellite mobile broadband speeds were too slow.

As for the funding need to build out such an ambitious network -- and we're talking billions here -- Falcone is keeping coy for now. "Harbinger is in discussions with a number of companies, which we cannot disclose, that provide a variety of services and solutions, but have not finalized anything with any potential partners," a spokesman told Higginbotham.

Both she and satellite industry analyst Tim Farrar, who has been all over the story, think T-Mobile is at the top of Harbinger's list. It remains to be seen if Falcone can "revolutionize" how Americans use wireless service, but it sure will be interesting to watch this newcomer's strategy unfold. And while his plans do sound grandiose, his prescient gamble on the collapse of the U.S. housing market suggests that Falcone has a knack for seeing around the corner.

Update 6 p.m. Monday: Verizon and AT&T are already crying foul over aspects of the FCC's approval.