AFTER FAILED ASSET AUCTION, WINSTAR FACES LIQUIDATION

Fixed wireless network could be broken up, sold to ILECs

Eight months after announcing its intention to reorganize under Chapter 11 bankruptcy protection, fixed wireless CLEC Winstar Communications is on the edge of liquidation following a failed asset auction.

“I don't think anybody's going to come forward with an acceptable financing package,” said Chris Mohr, analyst for New Paradigm Resources Group. “The market for Winstar's assets hasn't gotten any better over the last month or two, and it certainly hasn't gotten any better over the last week.”

There is no doubt that the current malaise in capital markets is contributing to the lack of investor support for a resurrected Winstar. But the bad track record of fixed wireless companies has been playing a big role as well, analysts said. At least two other major fixed wireless providers, Teligent and Advanced Radio Telecom, have folded this year, and AT&T and Sprint have put their fixed wireless efforts on hold.

According to reports, none of the bidders in Winstar's Chapter 11 auction produced an acceptable offer, including William J. Rouhana, the company's former chairman and CEO. Rouhana resigned last month in order to enter the bidding.

A U.S. Bankruptcy Court judge ordered Winstar to remain operational and give the auction participants another week to arrange funding after the FCC noted the CLEC serves key government agencies that could not withstand immediate loss of service. The FCC also noted that Winstar had not given customers the mandatory 30-day shutdown notice.

Representatives of Winstar did not return repeated requests for comment.

If a deal is not reached, Winstar likely would liquidate shortly thereafter. Chief among the company's assets are its network, spectrum and rooftop rights.

In liquidation, Winstar's network could be broken into smaller pieces that would be operated individually, analysts said. The most likely buyers in this scenario are ILECs.

“I would look for a lot of the incumbent carriers to purchase the equipment and, in effect, buy the customer accounts,” said Paul Kellett, senior director of market research for Pioneer Consulting. “Those customers have to go someplace.”

But the future of Winstar's local multipoint distribution service (LMDS) technology is far from certain in domestic markets. With its high bandwidth and line-of-sight limitations, LMDS is best suited to serve large businesses in densely packed urban areas, said Lindsay Schroth, analyst for The Yankee Group. It may not have much future in the U.S. because such areas are already wired with alternative broadband connections.

Because the viability of LMDS in the U.S. is questionable, some bidders might be interested in buying an even smaller chunk of Winstar's holdings: the spectrum.

While it could not be used directly by mobile end users, Winstar's 28 and 38 GHz holdings could be used to provide backhaul from mobile base stations — an important application as the wireless data market grows, said Peter Jarich, director of broadband research for The Strategies Group.