Will the Government Get its ($73.5 M) Cash Back from Open Range?

October 6, 2011

The good news for U.S. taxpayers is that Open Range Communications, the now-bankrupt startup that was trying to build rural wireless networks, never received the full amount of the $267 million loan it won from the U.S. Department of Agriculture back in 2008. The bad news is — according to research into Open Range’s agreement with the USDA — Open Range did receive $78 million from the USDA and has only paid back $4.5 million, leaving the government at the top of the creditors’ list of the Chapter 11-ed Open Range.

Sidecut Reports, which has been following the Open Range saga closely — we filed a Freedom of Information Act request with the USDA this summer to obtain information about the loan deal — has also learned from the company’s bankruptcy filing that Open Range owes several entities debts in the millions of dollars, the biggest being with network-infrastructure firms, including a $7.5 million tab with system integrator G4S Technology and a $5.59 million debt with Velocitel, which describes itself as a “wireless network services company.” G4S Technology, formerly known as Adesta LLC, was apparently proud of its work with Open Range, even posting a customer success story page on its website.

Fierce Wireless, which broke the story on Open Range’s shutdown earlier this week, is also now wondering whether or not there is a buyer for Open Range’s assets. Should there be a sale the most likely first-in-line creditor is the USDA, which in a statement said it had restructured the original loan deal earlier this spring and now “will be working with the Department of Justice on behalf of the American people to protect the federal government’s interest in the loan.” Presumably, to get back as much of the outstanding $73.5 million as possible.

During its brief life, Open Range was always a bit mysterious to the public — information was hard to come by on the company’s website and requests for interviews or facts about the company’s operations were routinely ignored — but according to research into the loan deal, Open Range did in fact provide independent financial audits to the USDA in 2009 and 2010 to demonstrate that the company was not in financial trouble, and regularly provided business plans to the USDA that demonstrated paths to success. Originally, the company pledged to provide “affordable high-speed broadband Internet and voice services to more than six million citizens in 546 underserved and rural communities” within five years; however, the company only ever launched spare services in what its CEO said was “143-ish” markets and though Open Range never confirmed a subscriber number, some reports put its user base at 20,000 customers at most.

To qualify for the USDA loan, Open Range had also publicly stated that it had received $100 million in financing from One Equity Partners, the private equity arm of banking house J.P. Morgan. Open Range’s bankruptcy filing also lists Vision Opportunity Master Fund, Ltd. as an equity holder with 57 percent of Open Range’s common stock (Open Range apparently retains 97 percent of a Series B preferred stock and 99.6 percent of Series C preferred stock, so it is not clear what if any control Vision Opportunity has). According to a Reuters story on the bankruptcy filing, Open Range said it has assets of $114 million and $110 million in debts, which means that creditors may be left solvent, provided that Open Range’s assets — which are most likely its network infrastructure — can be sold or transferred at rates that help the company balance its ledger.

That may be a problem, since the technology used by Open Range is WiMAX, which is being left in the dust as most service providers turn to the competing Long Term Evolution (LTE) standard for next-generation deployments. And according to the bankruptcy filing, not all those assets may be paid for since networking gear provider Alvarion — which had proudly announced a deal to sell Open Range as much as $100 million in gear two years ago — is listed as being owed a little more than $1.96 million.

Though Open Range’s plan to provide broadband to rural communities in 17 different states may have merely sounded ambitious when it was concieved, the reality on the ground was that the company’s deal to lease spectrum from former satellite services operator Globalstar was shaky and eventually collapsed, following the FCC’s decision last year to revoke Globalstar’s spectrum licenses (this situation is well explained by the StimulatingBroadband blog, which broke the story, and by Fierce Wireless, which has also followed the company closely). The spectrum problem resulted in USDA Rural Utilities Service Administrator Jonathan Adelstein famously sending a letter to FCC chairman Julius Genachowski that said in part that without access to the Globalstar spectrum, “the current business plan upon which the [Open Range] loan was approved is no longer feasible.”

Though Open Range won some extensions from the FCC to keep using the spectrum to serve current customers while it sought alternatives, including its widely touted but basically empty “deal” with LightSquared (which was never finalized), there was apparently no good way forward and as a result Open Range filed for Chapter 11, with its final fate to be decided in bankruptcy court.

While the USDA pointed out that the Open Range loan was approved by the previous (Bush) administration, it was hopeful that it would eventually get back the money it lent out. In a statement, the USDA said: “While we are of course disappointed this company did not succeed, rural infrastructure loans are essential to economic development in many communities throughout the country and 99 percent of these loans are repaid successfully.” For 73.5 million reasons, the U.S. taxpayers certainly hope that’s the case with Open Range.