Intelsat Scuttled CBA Over Money, Not C-Band Auction Terms: SES

Monday was the first day of trial in SES' suit against Intelsat for damages stemming from the collapse of their consortium (see 2007140067). Hearing the case is Bankruptcy Judge Keith Phillips of Richmond, who also presided over Intelsat's Chapter 11 proceeding.

In a roughly 150-minute opening statement, SES outside counsel Orin Snyder of Gibson Dunn referenced various internal Intelsat communications about it not being interested in sticking with an agreement to split proceeds of the spectrum clearing 50-50 with SES, even as it publicly told SES, the FCC and Intelsat investors otherwise. In a Jan. 8, 2019, email shown during opening argument, Intelsat Chief Financial Officer David Tolley told SES executives the company is "all in on the public auction [and] aligned with you in wanting to get this done, and done quickly."

But while Tolley and SES CEO Steve Collar met with former White House Chief Economic Adviser Larry Kudlow Feb. 3 about the accelerated relocation plan and higher compensation for clearing the spectrum, Snyder said, the Intelsat board decided it needed at least $5.6 billion from the deal to avoid bankruptcy. An email from Intelsat Chief Technology Officer Bruno Fromont suggested a strategy that the company show a united front with SES to the FCC to get the best possible financial deal, then "have the come to Jesus moment" with Collar afterward about not splitting proceeds 50-50. “That’s exactly what Intelsat did,” Snyder said.

Both satellite operators knew the FCC's opting for a private auction was a long shot, and it would have been "commercially absurd" to exclude the most-likely outcome -- a public auction -- from the CBA agreement, Snyder said. Even by fall 2019 when it became clear there was political opposition to a private auction, Intelsat never indicated the CBA deal was contingent on a particular FCC outcome, he said. After former FCC Chairman Ajit Pai announced the agency would do a public auction, the two companies still collaborated closely for the next 2-1/2 months on lobbying about details of such an auction and pushing for incentive payments for early clearing, he said. "It wasn't game over for this partnership," he said.

When the FCC put out its draft C-band clearing order, Intelsat CEO Stephen Spengler called Collar, asking to be let off the hook from the 50/50 split agreement because the order had the FCC allocating more money for Intelsat than SES, Snyder said, citing handwritten Collar notes. "He's not even saying the 50/50 is off," but seeking SES help in Intelsat avoiding bankruptcy. Tolley subsequently emailed Spengler, advising Spengler to "forget about splits, and forget about our 50/50 deal" and that "pigs get fat, hogs get slaughtered."

Snyder said Intelsat evidentiary documents are taken out of context and none supports the argument that accelerated relocation payments aren’t the kind of compensation subject to the agreed-upon 50-50 split.

SES “got way more than it deserved,” Slade said. Originally, SES had been in line for $1.3 billion of a $5 billion accelerated relocation proceeds pool, then $2.4 billion of an $8.8 billion pool. “This was found money for them,” and it implored Intelsat to agree to those terms, Slade said. He said it was Intelsat that pushed for the satellite operators to keep negotiating with FCC, resulting in the agency agreeing to a pool of $9.7 billion and SES getting $4 billion (while Intelsat got cut from $5.1 billion to $4.9 billion). “And they’re still here demanding more,” he said. Slade said Intelsat has yet to receive its Phase I accelerated clearing payment.

The satellite operators' consortium was repeatedly clear in communications with the FCC and its own consortium agreement that its raison d'etre was to push for a secondary-market agreement to spectrum clearing that would have the satellite operators directly negotiating with mobile carriers, Slade said.

SES internal emails showed company officials believed the agreement with Intelsat didn't cover if the FCC opted to allocate specific amounts directly to individual incumbent C-band satellite operators, Slade said. When the FCC indicated it was doing that, “SES knew it had a problem" and tried to go back to the negotiating table with Intelsat to get more concrete 50-50 terms, he said. He cited SES-suggested amendments to the consortium agreement that would incorporate a public spectrum auction.

Collar, the sole witness called Monday, testified the two companies had been "pretty fierce competitors" before the FCC C-band proceeding. He said SES wanted a 50-50 deal because C-band clearing “would be a long and complicated undertaking [and] we wanted our interests aligned” with both parties equal partners. Collar said since it was unclear what the FCC would do in clearing, “the only thing we insisted on is we were in this together, we were 50-50.” Since what the FCC wanted to do with the C-band was without any obvious parallel, the idea of a consortium agreement only for one possible outcome is “nuts,” Collar said.

Collar said he and Spengler were having “countless” calls in fall 2019, and no one ever indicated a public auction would end the partnership. After the auction announcement, Collar said the companies continued to jointly communicate with customers and lobby about the sales process to maximize proceeds. “They needed us, we needed them,” he said.