Description

Nextnav is in the flying car business. Except not really at all. They are actually an asset play, as the company owns 8 MHz of contiguous, unencumbered, low band spectrum that covers 93% of the US population. I believe this spectrum could be worth ~$18 per share, possibly within 1 year.

Spectrum plays of course have a mixed record, with some ridiculous success stories such as Straightpath (STRP), and some not so good stories, like the satellite players.

This story is not without hair on it.  The actual business is the product of a SPAC that made some ridiculous claims along the way (including a reference to flying cars), and it continues to burn cash. However, I believe an investment in Nextnav (and its spectrum) is likely to be successful, although nowhere near as successful as STRP. The reason for this confidence is tied to 1) the spectrum itself and 2) the people involved.

The Spectrum

Nextnav’s spectrum is in the 900 band, specifically 919.75-927.75 GHz. Low band spectrum can travel long distances, and penetrate walls and dense tree cover. However, it cannot carry as much data as higher band spectrum.  Never the less, low band makes up a valuable part of a 5G spectrum portfolio, as travelling long distances is important in rural areas, and penetrating walls is important in urban areas (although there are other solutions there).  One industry expert I spoke with described NN’s spectrum as, “nothing fancy, straight down the middle, plain vanilla spectrum.” This is important in context of satellite tied spectrum plays that come with a lot more hoops to jump through.

The company first obtained the rights to this spectrum in 1999 for $2.4M. This spectrum has been allocated by the FCC for “Location and Monitoring Services” (LMS). What this means for Nextnav is that they have two businesses.  One aims to add the vertical axis to the existing GPS system, and the other is essentially a next-gen GPS system that is more powerful and more difficult to spoof than the existing GPS system. These attributes have gotten some buzz lately tied to problems with existing GPS in Ukraine and Gaza/Israel.  Regardless, for the purposes of this writeup, the important things to know about these businesses are:

1) they are burning cash at a rate of ~$35M per year and

2) Nextnav has done everything that the FCC has asked them to do with their spectrum allocation. This will be important when we get to valuation

3) All indications are that 8 MHz of spectrum is way more spectrum then you need to run these businesses. In fact, one industry source I spoke with said he believed Nextnav’s businesses would be fine with between “0 and 1 MHz”, meaning that in his view you could even run the GPS businesses and also transmit data at the same time on a very narrow sliver of Nextnav’s spectrum.

Nextnav is presently validating point 3 above through a series of tests being run in Palo Alto that involve the company running their core business while also testing different 5G bandwidths and power levels to concurrently carry data on the spectrum. These tests may even already be complete, and I expect that an FCC filing requesting that some portion of the spectrum be repurposed for broadband is imminent. Upon repurposing, the company could sell or lease this spectrum to the highest bidder.

Of course, none of this matters if the FCC refuses to repurpose the spectrum. So how do we gain confidence on that front?

First, from 40,000 feet, the FCC has made it clear that they want more spectrum available for broadband.  This is widely known and not controversial.  Zooming in a bit though, we can see that in May of 2020 the FCC  already repurposed 6 MHz of 900 band spectrum for Broadband usage. This spectrum is owned by Anterix (ATEX). Anterix is now in the process of selling that spectrum, but unlike the Nextnav spectrum, the Anterix spectrum is littered with incumbents and squatters, meaning that for Anterix the sale process is proceeding county by county, with the buyers being utility companies and the like that would like to have a private network.

Assuming that Nextnav can demonstrate an ability to both meet the FCC’s demands around LMS, and carry data, it is hard to see why the FCC would not also allow this spectrum to be repurposed for broadband as they have already allowed the repurposing of other 900 band spectrum.

The People

If you travel back through the VIC archives to the two Straightpath threads, you will see mention of Lloyd Miller III, who successfully ignored all of the noise and short attacks on Straighpath on his way to making a fortune...  Miller  – deceased - was a somewhat mysterious character that I have heard described as “the best small and micro cap investor ever.” His estates is now run as a family office by Neil Subin, who as I understand it, worked closely with Miller while he was alive, and also managed a fund called Broadbill Investment Partners.  Subin’s spectrum credentials can be seen below:

·        Chairman and major shareholder of Teletrac, Inc, a developer of vehicle tracking and location systems through wireless spectrum and holder of FCC licenses in the 900 MHZ band.

·        Director and large shareholder of Nucentrix Broadband Networks, Inc., a wireless broadband access provider and holder of FCC licenses in the 2.5 MHz band.

·        Director and large bondholder of Metrocom Wireless Inc., a consumer electronics provider and holder of FCC licenses in the 2.3 MHz Band.New CEO November.        

·       Director and large shareholder of WCS Wireless LLC, a manufacturer of communications equipment and substantial holder of FCC licenses in 2.3 MHz band.

·       Largest shareholder of Mpower Communications Corp., a competitive local exchange carrier.

·       Chairman of the Board, Director, and large shareholder of First Avenue Networks Inc., a wireless backhaul provider and holder of FCC licenses in the 39 GHz band.

·       Director and large shareholder of CCTV Inc. a holder of FCC licenses in the 1.4 MHz band.

·       Chairman of the Board and large shareholder of Primus Telecommunications Group, Inc., a diversified telecommunications holding company with interests in competitive local exchange carriers, wireless access and VOIP in the U.S., Canada and Australia, and holder of Canadian 2.5 MHz licenses.

·       Director and large shareholder of 360 Networks Inc., an owner of a substantial fiber network.

·       Large shareholder of U.S. Telepacific Holdings Corp., a large competitive local exchange carrier.

·       Director of the Leap Wireless International Inc. Liquidating Trust.

·       Director of the Iridium Communications Inc. Liquidating Trust

Subin is a Director and owner of about 7.5% of Nextnav’s common stock. He also owns about 3.8M warrants (this includes Broadbill).

Continuing through the VIC archive, you will also notice Joseph Samberg’s name come up on the Straightpath thread.  At the time, I believe Samberg was running a hedge fund (JDS Capital), and I believe he is now operating as a family office. Similar to Miller, Samberg made a killing in STRP, and he has been involved in other spectrum plays in the past.  Samberg owns almost 11% of NN, and last filed a 13G indicating he had increased his position a few days ago.

The Chairman of the Board is Gary M. Parsons, perhaps best known as the founder of XM Satellite Radio, which was of course merged with Sirius. Mr. Parsons then served as Chair of the combined company.

The point here is just that the main players are very experienced spectrum players, that have no need to play around with a money losing GPS business.  It seems clear that they are here for the spectrum value.

If you need further proof of this, consider Subin’s comments when the SPAC transaction closed:

"We believe that this is a 100 year plus asset that will drive innovation, enable the global economy, and produce significant free cash flow for decades to come that I believe we are creating at or below underlying spectrum value.”

Or comments from Parsons on the Q4’22 conference call

"[…]having 8 megahertz of low-band spectrum available for broadband carriage is massively valuable. I mean, anybody that does any spectrum valuation understands that."

Where Are We Now?

At present, Nextnav is valued like a busted SPAC that consummated a transaction with revenue projections that are laughable in hindsight, and an investor deck that mentioned flying cars. This is because Nextnav IS indeed a busted SPAC that consummated a transaction under those conditions.

You have to do the work to understand that there is more than meets the eye.

The company has indicated that they believed their testing program to validate the idea that they can “split” their spectrum should be largely complete by the end of 2023. They have also indicated that they are very confident that they will have proof of concept in hand.  From there, the company would file for license waivers from the FCC.  It should be noted that simply making the filing should be considered a positive development, because the FCC must agree to accept the filing, which indicates they are at least open to the idea.

From there, it is difficult to know how long the FCC review process would take, with anything from a few months to 2 years not being out of the question. What I can say is that my research suggests that Nextnav has done everything possible to grease the wheels in advance, including hiring a new CEO in November who also serves as a member of the National Telecommunications and Information Administration (NTIA) Commerce Spectrum Management Advisory Committee and on the FCC Technological Advisory Council. Industry sources have suggested that she is an insider on these matters.

Assuming the spectrum is repurposed to broadband, the next step would presumably be to monetize it, either through sale or lease.

Valuation

I value NN on a MHz-pop basis, assuming that the GPS businesses are worth $0, and including 1 year of cash burn.  As for MHz-pop, if you are not familiar, this is an industry term that is basically the amount of spectrum multiplied by the covered population.  There are multiple precedent transactions that can suggest a value for low band spectrum.  Most recently is T-Mobile buying 600 MHz spectrum from Comcast at a reported $2.21 per MHz-pop. However, independent industry valuation experts have suggested that thinking Nextnav could get that much would be aggressive, although in spectrum world, crazy things sometimes happen.

In any case, base case from independent valuation experts I have spoken with is $1.30 MHz pop for this spectrum. This is based on a proprietary model that includes physical inputs such as frequency, bandwidth, contiguous coverage, but also where the most likely buyers are in their capital cycle.  This would be the gross number, with the potential that this headline number gets netted down due to the FCC requiring windfall payments.  In other words, the FCC isn’t keen on just letting people use the spectrum and pocket billions of dollars, and at time the FCC may politely ask sellers to split the profits with them.

However, in cases when the FCC does not collect a windfall payment, it is because the owners of the spectrum have done everything they were supposed to in accordance with their previous agreement with the FCC, and they plan on continuing to do what they are doing with a portion of their spectrum.

Industry sources have said that Nextnav has definitely done everything they were supposed to (of course nothing is guaranteed), and that they are likely to only sell maybe 7 of their 8 MHz so that they can continue to do what they are doing on the GPS side, and avoid a windfall payment.  As such, I assume that Nextnav only attempts to monetize 7/8ths of their spectrum and consider a variety of situations.

The $0.65 MHz case assumes the FCC collects a 50% windfall of base case pricing.  The $1.50 case suggests that buyers maybe get a little bit silly. That being said, antenna technology is evolving to the point that antennas can be updated to receive new spectrum by software, which in theory means that a spectrum buyer would have lower capex tied to new spectrum, and thus they could pay more for spectrum and come out with the same ROIC, so maybe $1.50 is not so silly.  There is also a very silly case as spectrum such as this would be the backbone for any new entrants that would want to build nationwide coverage, and this is the cleanest piece of low band spectrum that is out there. (GOOG? AMZN? APPL? TSLA?)

Obvious sensitivities above include the amount of cash burn and additional shares that would come with an extended timeline. I also don’t have a view if the stock should trade at a premium to spectrum value, which of course implies that the 2 businesses are worth something, or if the stock should trade at a discount to spectrum value, which would imply that the two businesses are likely to just incinerate cash indefinitely.

In all cases upside from present prices is somewhere between considerable and ridiculous. 

Catalyst

An FCC filing is expected within weeks - i would think that this filing would cause the market to take notice and re-rate shares higher

FCC approval

Sale / Lease of spectrum