SELL SIGNALS UPDATE: Iridium's Debt Clock Looms Closer
Analyst Bullpen Analysis Archive
iionline.com
Dave Sterman: Director of Online Research (6/25/99)
Shares of Iridium (NASDAQ: IRID - Quotes, News,
Boards)rebounded smartly this week. After slipping below
$6 in mid-June, the stock hit the $15 mark on Thursday
before retreating. The stock continued that pullback in Friday
morning trading.
In fact Iridium shares were down $3.00, or 22%, to
$10.50 in early afternoon trading.
Much of the rise can be chalked up to a short squeeze as
the company unveiled a seemingly bullish pricing plan that
could finally deliver growth to the company's miniscule
customer base. Now that shorts have been forced to cover,
they should jump back in and short more shares anew.
Right away.
That's because Iridium's problems haven't disappeared.
They've just been stalled. The company still lacks a credible
effort to lure more customers, and its bondholders are
getting ready for a final showdown for control of the
company.
In a tacit acknowledgement that consumers will never, ever
pay the ridiculously expensive prices for the company's
equipment and services that the company wanted, Iridium's
new management team decided to quickly slash prices
across the board. But the phones are still too way too big.
The company plans to roll out smaller phones in about six
months. That might be about five months too late.
The price of the phones was slashed from $3,000 to less
than $1,000. That's still about $700 more than a cutting edge
Motorola (NYSE: MOT - Quotes, News, Boards) StarTac
phone. Prices have also been slashed on calls made on the
Iridium network, but still remain well above competitive
alternatives.
Cutting prices on products and services may help bring in
more subscribers. But it throws the company's high cost
structure into the spotlight. As a refresher, Iridium was
launched using state-of-the-art equipment that was not only
costly to launch, but expensive to operate on a continuous
basis.
The initially high pricing structure was the justification for
sparing no expense in developing the system. Now that
prices have been slashed, it is hard to conceive how the
system can be operated profitably. More importantly, can
the new pricing structure generate enough cash flow simply
to service the current debt load? Probably not.
All of these details will be discussed on or around June 30,
when Iridium management sits across the table from the
bondholders. Iridium execs will likely focus on the benefits of
the new pricing structure. Bondholders will likely focus on
how they can get their money back.
Some have speculated that the bondholders will have no
choice but to go along with a restructuring that will greatly
reduce the value of their bonds. Not bloody likely.
More likely, bondholders will exercise their right to either
liquidate the equity, or convert their interests into equity at
very favorable terms. Either way, it spells disaster for the
stock price.
Bottom Line: Add it up: A new business plan that will fail to
generate meaningful cash flow. Bondholders knocking at the
door. Products and services that are still too expensive. As
all of this bad news comes to roost over the next few
quarters, the shares will ultimately be worth a few bucks at
best.
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Analyst Bullpen Analysis Archive
SELL SIGNALS UPDATE: Iridium's Debt
Clock Looms Closer
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iionline.com
Dave Sterman: Director of Online Research (6/25/99)
Shares of Iridium (NASDAQ: IRID - Quotes, News,
Boards)rebounded smartly this week. After slipping below
$6 in mid-June, the stock hit the $15 mark on Thursday
before retreating. The stock continued that pullback in Friday
morning trading.
In fact Iridium shares were down $3.00, or 22%, to
$10.50 in early afternoon trading.
Like this Article?
Much of the rise can be chalked up to a short squeeze as
the company unveiled a seemingly bullish pricing plan that
could finally deliver growth to the company's miniscule
customer base. Now that shorts have been forced to cover,
they should jump back in and short more shares anew.
Right away.
That's because Iridium's problems haven't disappeared.
They've just been stalled. The company still lacks a credible
effort to lure more customers, and its bondholders are
getting ready for a final showdown for control of the
company.
In a tacit acknowledgement that consumers will never, ever
pay the ridiculously expensive prices for the company's
equipment and services that the company wanted, Iridium's
new management team decided to quickly slash prices
across the board. But the phones are still too way too big.
The company plans to roll out smaller phones in about six
months. That might be about five months too late.
The price of the phones was slashed from $3,000 to less
than $1,000. That's still about $700 more than a cutting edge
Motorola (NYSE: MOT - Quotes, News, Boards) StarTac
phone. Prices have also been slashed on calls made on the
Iridium network, but still remain well above competitive
alternatives.
Cutting prices on products and services may help bring in
more subscribers. But it throws the company's high cost
structure into the spotlight. As a refresher, Iridium was
launched using state-of-the-art equipment that was not only
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