Billionaire Philip Falcone’s LightSquared Inc. reached a 15-year deal with Sprint Nextel Corp. (NYSE: S) to share network expansion costs and equipment, and to provide high-speed wireless service to the phone company.

Falcone told Harbinger Capital Partners hedge fund investors yesterday about the accord in a letter obtained by Bloomberg News. The companies were discussing a deal valued at as much as $20 billion, people familiar with the matter said earlier this month.

“LightSquared and Sprint will jointly develop, deploy and operate LightSquared’s 4G LTE network,” according to the letter. “Sprint will become a significant customer of LightSquared’s 4G LTE network.”

The deal is an important step forward for Falcone, whose effort to challenge Verizon Wireless and AT&T Inc. (NYSE: T) was met with skepticism after plans for LightSquared emerged in government filings about 15 months ago. Falcone is gambling more than 60 percent of his hedge fund on LightSquared.

“This deal is a huge positive for Harbinger investors simply because it represents such a large proportion of his hedge fund,” said Don Steinbrugge, managing partner of Agecroft Partners LLC, a Richmond, Virginia-based firm that advises hedge funds and investors. “It’s a step in the right direction given all the uncertainty surrounding this investment.”

Sprint’s Challenge

For Sprint, the deal would provide a new source of revenue as the third-largest U.S. wireless company struggles to compete with bigger rivals. AT&T is trying to acquire Deutsche Telekom AG (DTE)’s T-Mobile USA unit, which would let it pass Verizon Wireless to become the country’s No. 1 wireless operator. Sprint Chief Executive Officer Dan Hesse is fighting to block the deal, which needs government approval, arguing it would stifle competition.

Sprint, which has lost contract customers in 14 of the past 15 quarters, has pledged $5 billion to upgrade its network over the next three to five years. The company can use LightSquared’s network to lessen the load on its own network as data demand has skyrocketed, an issue that has plagued other carriers.

Hesse said last month Sprint was in talks with Clearwire Corp. (CLWR) on a similar network deal. Kirkland, Washington-based Clearwire provides Sprint’s fourth-generation wireless service.

Overland Park, Kansas-based Sprint fell 2 cents to $5.19 yesterday in New York Stock Exchange composite trading. The shares have gained 23 percent this year.

GPS Questions

LightSquared CEO Sanjiv Ahuja said in a June 10 televised interview with “Bloomberg West” that his company had held discussions with Sprint. Bill White, a Sprint spokesman, and Steve Bruce, a spokesman for New York-based Harbinger, declined to comment.

“This gets LightSquared to their goal of nationwide coverage much more quickly than if they were going to build it out on their own,” Chris Larsen, a Piper Jaffray & Co. analyst in New York, said in an interview.

The Federal Communications Commission has asked that LightSquared study whether its network interferes with global- positioning systems. The company has commissioned a study of the issue, due July 1.

“LightSquared will have to resolve these issues with GPS before Sprint can make full use of that extra capacity,” said Larsen, who rates Sprint “overweight.”

Separately, LightSquared will announce as soon as next week it will begin soliciting bids to sell wireless service from its satellite to governments or other agencies to help supplement their earth-based emergency and first-responder networks, said a person familiar with the matter.

The satellite service would serve as a backup for the terrestrial networks in the case of emergencies that knock out equipment on the ground, said the person, who declined to be identified because the plans aren’t yet public. LightSquared launched the satellite in November.

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