Just wanted to distill the previous article down a bit:
(By Carole Winkler
Special to TheStreet.com)
Under the heading of "Dont cry for Motorola":
How can these people miss the point so completely? Here they whine about 'pending loses'
Alex Cena, an analyst with Salomon Smith Barney, says Motorola could
lose $1 billion to $1.7 billion thanks to Iridium's continuing
financial woes. (Solly hasn't performed underwriting for Motorola or
Iridium.) After allowing for $800 million in reserves already, the
financial hit would be $200 million to $900 million, depending on when
Motorola had to recognize the losses. At a maximum, a loss of this
magnitude could equal Motorola's earnings for a whole year.
But if Motorola owns 18% of Iridium and Iridium's debt load is $3.5 billion that leaves Mot on the hook for 630 million. But Mot has loaned money to Iridium and extended the due date on maintenance payments:
If Iridium defaults on that, then the company will also be considered in default of another
$750 million credit line guaranteed by Motorola, not all of which has
been utilized by Iridium. In addition, by Sept. 1 Iridium will owe
approximately $470 million to Motorola: $400 on an
operations-and-maintenance contract and $70 million previously owed to
Motorola from Iridium.
But Mot says they have not counted any of the money yet paid from Iridium (some confidence there huh!) How can you record a charge if you have not yet recorded any of the proceeds?
Still, the company said an Iridium restructuring could "necessitate an
additional special charge" in the third quarter. It also noted that, in
the second quarter, Motorola again deferred recognition of profits from
its big operations and maintenance contract with Iridium. And it
recorded a $126 million charge to write down the value of Iridium
bonds.
Neat how Iridium's debt load equals how much they have paid to Mot:
Motorola also has profited from its relationship with Iridium. It
already received $3.5 billion as prime contractor to build Iridium,
which was finished in November 1998. Of course, Motorola hasn't
recognized the profits from that contract, instead placing around $800
million into financial reserves, including $50 million in the first
quarter, according to Cena at Solly. Motorola didn't specify whether it
put aside more reserves for Iridium in the second quarter. If Iridium
survives, Motorola could complete the five-year operations and
maintenance contract, bringing combined total revenue from Iridium to
around $6.7 billion.
Thanks Bill for a nice summary:
"Motorola is playing both sides of the equation here," says analyst
William Kidd of C.E. Unterberg Towbin, a firm that hasn't underwritten
for Motorola or Iridium. "The operations and maintenance contract is
very profitable for Motorola and expensive for Iridium. They are
charging $500 million per year for services that cost them between $150
and $200 million to provide." Motorola declined to comment on the
issue.
Can you say Win/Win for Mot?
The trick will be to convince bondholders to accept more equity in lieu
of payment and convince the shareholders to accept a large dilution,
says Kidd. "Afterwards, if Iridium goes bankrupt, dilution will occur
to an even greater extent because Motorola will acquire a pseudo-equity
position proportional to the debt. The resulting dilution will be
huge."
Geez.
Jeff Vayda |
