Intelsat stock had its worst day on record on Wednesday, down 29% to close at $14.43. Why? Once again, it’s C-band speculation-induced volatility. The vast majority of Intelsat (and SES) investors who we speak to are laser-focused on the C-band outcome, to the near exclusion of all other factors. This fact was eminently clear on Intelsat’s latest earnings conference call when nearly two-thirds of the questions pertained to C-Band.
With so much interest focused on C-Band, even incremental developments can produce a sharp stock reaction. In this case, two specific triggers accounted for Intelsat’s sharp stock decline:
- JP Morgan cut Intelsat (and SES) to Neutral, positing that the C-Band process is looking more complicated given its view that pushback in the Senate from Sen. John Kennedy (R-LA) and others in favor of a public auction (vs. private CBA auction) is building. We understand that JP Morgan’s voice on the situation echoed loudly through the markets yesterday;
- Market overreaction to that risk. The latest bear-case noise relating to C-band was highlighted in mid-October interview with Politico, where Sen. John Kennedy (R-LA) insisted that President Trump responded positively to his concerns regarding a private auction for the C-Band spectrum.
The two questions interested parties may have in mind: (1) What is the likelihood of a public auction? And (2) What is the likelihood that the CBA proposal proceeds on a timely basis? We don’t profess to have a perfect crystal ball – but there are reasons for optimism from the standpoint of the satellite industry. Furthermore, there is no material change in the facts or circumstances of the C-band process compared to, say, last week.
Certain constituents in Congress object to the CBA (C-Band Alliance) proposal. A wide range of arguments have been made, usually centering over the fact that proceeds from a private auction would benefit the industry (particularly Intelsat and SES, both of whom are legally domiciled outside the U.S.) versus the U.S. Treasury. Other complaints include peripheral issues such as FCC oversight, process complexity, timing, etc.
Perhaps the loudest voice in opposition to the CBA proposal, Sen. Kennedy (R-LA), issued a strongly-worded October 3rd press release, stating, “In a move that will benefit American taxpayers, U.S. Sen. John Kennedy secured language in the Financial Services and General Government Appropriations Act of 2020 that will free up C-band spectrum for 5G technology through a public auction.”
Like many political statements, Sen. Kennedy’s strongly-worded assertion overstated the significance of the language included in the Act. More specifically, the language he “secured” states:
“The Committee encourages the FCC to prioritize resources toward exploring opportunities for spectrum to help accelerate the deployment of 5G to rural communities… However, the committee remains concerned by proposals that entail limited FCC oversight and public input, and contain no guarantee that taxpayers and the U.S. Treasury benefit from revenues generated by the sale of 5G licenses. The airwaves are a public resource, and the Federal Government has a responsibility to exercise appropriate oversight of its allocation. Therefore, the Committee encourages the FCC to conduct a public auction of the C-band spectrum that is fair, open, and transparent.”
Fortunately, administrative law gives the FCC final word on the matter unless the White House directs otherwise, or Congress passes a law withdrawing the FCC’s authority. Admittedly, President Trump remains a wild card. However, despite a small bipartisan group in the House introducing H.R. 4855 – Clearing Broad Airwaves for New Deployment Act (“C-BAND”) three weeks ago, the prospects for Congress passing specific C-Band legislation in the current, acrimonious environment borders on 0%, in our view.
How Would the FCC Hold a Public Auction for Privately Licensed Spectrum?
The answer? Unless we’re missing something, it can’t. C-Band spectrum currently supports over 100 TV and radio stations serving more than 120 million U.S. households. The FCC (or Congress) simply cannot expropriate these licenses and auction it off to wireless carriers, as such action would irreparably harm the satellite and broadcasting industries — inviting costly, time-consuming litigation that would inhibit the FCC’s ability to deploy 5G services rapidly.
To be clear, there are approaches for the FCC to modify licenses unilaterally. For example, Section 316 of the Federal Communications Act gives the Commission the authority to amend entire classes of station licenses by rulemaking or adjudication. Importantly, this authority has been interpreted not to extend to any “fundamental change” to the terms of a license.
So, where does this leave us? While we are not attorneys or legal scholars, we do know basic history. And the history of rapidly structuring and executing public spectrum auctions is not good. Over the past three decades, most public auctions have required 5-12 years to reach completion. History also suggests that attempts by the FCC to resell previously-licensed spectrum can result in paralysis.
Echoing this point, Commissioner Michael O’Reilly, in September stated, “Most of the criticism of what is known as the CBA proposal shows a lack of understanding of how the internal commission works. Please don’t anyone try to lecture me on the commission’s supposed efficiency and timeliness in conducting auctions.”
What then, will the FCC do?
Moving Toward a Private Auction
The FCC has been clear and vocal that speed is of the utmost importance given the economic importance of 5G and the fact that China is sprinting ahead of the U.S. in 5G deployment. And ostensibly, even Sen. Kennedy and his supporters agree that it is critical to “help accelerate the deployment of 5G.” According to the CBA:
The economic benefits of repurposing the C-Band to speed 5G deployment will be enormous. Building the network infrastructure necessary to support 5G will drive $275 billion in private-sector U.S. investment, spurring $500 billion in economic growth. More than 3 million new jobs will be created for American workers
Recent news stories have indicated that Sen. Kennedy subpoenaed FCC officials out of concern that his pleas for a public auction have been ignored. However, resorting to subpoenas doesn’t exactly signal a position of strength, and we expect this stalling action to fail ultimately.
In summary, the CBA was already facing the growling but toothless beagle (Kennedy) gumming the CBA’s leg to death. The gumming in the past few days has gotten more intense (as has the growling), but really, all the CBA should have to show for it is a damp trouser leg.
We remain optimistic that a positive path forward has been paved, despite the latest growl.