ChicagoTribute. Motorola may fold, restructure Iridium
By Andrew Zajac
Tribune Staff Writer
July 14, 1999
Motorola Inc. Wednesday acknowledged for the first
time that a bankruptcy liquidation of one its most
ambitious and expensive technological projects, the $4
billion-plus Iridium satellite phone system, is a
possibility.
But company officials said Motorola, which has
potential exposure of $2.2 billion in the trailblazing
project, can withstand its collapse.
Company president and chief operating officer Robert
Growney listed three scenarios for Iridium --
reorganization, either with or without bankruptcy court
protection, or a liquidation.
"It is Motorola's hope that this last scenario can be
avoided," Growney said during a conference call with
analysts the morning after the company's mainly rosy
quarterly earnings report.
Growney said that income from the announced sale of
Motorola's low-end semiconductor operations to the
Texas Pacific Group and the Schaumburg company's
antenna site business should largely offset any drain on
the company's bottom line. The semiconductor sale is
expected to bring in $1.6 billion.
In addition, Motorola has built up a reserve by taking
money from other business units and by holding off
booking profits from its contracts with Iridium.
Investment analysts peg the reserve at $1 billion.
"Should an Iridium liquidation in bankruptcy become
unavoidable . . . our balance sheet will remain strong,"
Growney said.
Motorola is the founder of Iridium, is its main
contractor and owns just over 17 percent of the
northern Virginia-based company.
Company officials Wednesday repeated that they will
make no more financial commitments to the project
without sharing the risk with other large investors.
Growney said further investment by Motorola "depends
on substantial participation from all the parties with a
significant financial interest."
Other significant investors include Sprint Corp., the
Russian rocket company Khrunichev and Lockheed
Martin Corp. Motorola is the only investor with more
than a single-digit stake in Iridium, according to
Iridium-supplied data.
Iridium spokeswoman Michelle Lyle said that "there has
been no discussion at all about liquidation." Banks have
given Iridium until August 11 to work out a restructuring
on $800 million in debt or to meet subscriber targets.
Iridium operates a network of 66 satellites that transmit
calls virtually anywhere on earth and is billed as the first
hand-held global phone service.
Unlike existing satellite phone services that depend on
satellites in high orbit, the Iridium constellation operates
in low earth orbit, eliminating the annoying gap between
the time words are spoken on one side of a
conversation and when they're heard on the other end.
But for all its technical sophistication, Iridium has been
coolly received since service began last November.
Users complained that Iridium service was too
expensive and that the special Iridium phone was too
clunky and didn't work inside buildings.
Since failing to meet subscriber goals earlier this year,
Iridium has broadened its target market beyond upscale
businesspeople to include government and mining
workers.
Prices have been cut by $3 to $7 per minute to $1.59
to $3.99 per minute, and the price of the phone has
been slashed from about $3,000 to $1,495.
But Iridium still cannot compete with land-based
wireline and wireless networks, which have expanded
dramatically since the network was pitched by
Motorola engineers in the late 1980s.
From a financial standpoint, Motorola has taken the
necessary steps to avoid serious bruising in the event of
an Iridium failure, said analyst Brian Modoff, of
Deutsche Bank Alex Brown in San Francisco. "I don't
think it does a lot of damage," Modoff said.
Financial markets likely will view a failed Iridium as "a
misconceived idea from before" Motorola became a
more market-focused company, Modoff said.
Whatever its fate, Iridium yields valuable lessons about
the need to identify markets before embarking on
massive communications networks, according to
Herschel Schosteck, a telecommunications analyst
based in Silver Spring, Md., who has been a longtime
skeptic of the project.
Iridium is "a superb technical accomplishment" but is
also a case of "engineering self-delusion," said
Schosteck. "The lesson is that there has to be a rational
business case" for costly projects.
Despite Iridium's dire straits, Motorola is wading into
another even more ambitious satellite project, the $10
billion plan by Teledesic LLC to array 288 satellites to
provide global high-speed Internet access.
Motorola has announced a $750 million investment in
the project and last week was awarded the contract to
build the satellites for Teledesic, which is backed by
Microsoft Chairman Bill Gates and wireless phone
pioneer Craig McCaw.
Schosteck said he hasn't done market studies, but
wonders if Teledesic will encounter difficulties similar to
Iridium's. Land-based broadband networks could
expand so quickly over the next few years that they
may undercut Teledesic, he said.
Motorola shares Wednesday closed at $94.87, down
$1.62.
Shares of Iridium LLC lost more than 17 percent of
their value, ending the day down $1.44 to $6.75, close
to a 52-week low of $4.96 and far off a high of
$60.50.
In the just-concluded second quarter,Motorola posted
profit of $206 million, including special charges, on
sales of $7.5 billion.
Growney said Motorola should meet analysts'
consensus estimates of 51 cents per share and $7.8
billion in sales for the third quarter. |
