I pulled this off of Yahoo, so view it at your own risk. I don't agree that Gilat has "bitten off more than it can chew". Top management is very shrewd at Gilat and I can't see them putting themselves into a situation where they fail due to lack of financing.
Gilat Satellites - Where Angels Fear to Tread
30.04.2001 - 15:51
Globes - Israel's Business Arena
Moran Bar Kochva
We are well aware that Gilat Satellite Networks isn’t exactly floating on air, but according to a report on the company by Deutsche Bank analysts, it also hasn’t managed to anchor itself in the ground of reality. Gilat (GILTF) is currently trading at a per share price of $11.7, representing a market value of $270 million, and 93% less than the peak share price of $184. This freefall has raised emphatic questions about the gap between the harsh realities and the dream that many of the company’s analysts and managers persuaded us to buy into.
The Deutsche Bank report endeavours to draw a dividing line between the dream and reality. For sheer boldness, the move made by Gilat is worthy of admiration. The company’s core activity, namely a profitable and successful business of selling small VSAT satellite dishes, were not enough for Gilat. It accordingly resolved to make its debut in the consumer fast Internet market. Which is to say, Gilat perceived the vast potential offered by broadband Internet service, realizing that it had the only technology in the world that enables the two-way provision of such services via satellite to the remotest spots on the earth’s surface. It therefore decided to take the lead in forming a joint business venture that would hook up subscribers to an ISP service. They called their company StarBand, and it was formed as a partnership between three companies - Gilat, Microsoft and EchoStar, the second largest DBS provider in the United States.
The Deutsche Bank report’s bottom line is clear and concise. Gilat erred in abandoning its core businesses to go foraging in strange fields. The analysts assign Gilat a "market return" recommendation, as long as the company doesn’t abandon its fast Internet ventures and doesn’t return to its core activities. The analysts write that StarBand is demanding massive financing to the tune of $400 million, in order to reach the cash flow breakeven point by 2003. But, given the state of the market today, they are dubious as to whether StarBand has the ability to raise such a tremendous amount. People in Gilat are aware of the need to raise capital quickly. But, as ill luck would have it, and also possibly due to a slow response time, StarBand has not managed to raise money on the capital markets, even though it prepared a prospectus, and even though the underwriters assigned the company a market value of a billion dollars.
Deutsche Bank’s conclusion, in view of the situation in which Gilat has got itself embroiled, is that the company must sell StarBand and salvage what remains after its losses, emerging by the skin of its teeth. Gilat, having plunged headfirst into the Internet business, is paying the full price for its foolhardiness. Due to the declining demand for communications equipment for providing fast Internet services, the company got stuck with inventories, and its ratio of debt to sales turnover comes to 65%, or $248 million - and that is not the whole story. The authors of the report note that Gilat has invested $90 million in two start-ups, and write-offs can be expected at a later date.
Deutsche Bank maintains that, due to the difficult situation the company has become involved in, it’s preferable to invest in Gilat’s debentures, rather than in the company’s shares. But it would appear that, considering the proliferation of question marks in the report, investing in Gilat in general carries a very high risk.
To sum up, the analysts write that the only solution for Gilat, if it is to reduce its risk, and the debt load under which it staggers, is to sell off StarBand. The title the authors chose for their report was: "Gilat Satelllites - Where Even Angels Fear to Tread". Positively frightening.
Published by Israel's Business Arena on April 30, 2001 |
