From this week's Barron's: Lost in Space
Motorola's goof on Iridium ends up costing $2.5 billion
Iridium was supposed to be a shining light of modern technology, encircling the planet with satellites and enabling customers to phone home from anywhere in the world. Instead, it has become something of a deathstar, plagued by low demand, technological glitches and tough competition. We predicted as much in a cover story in June 1998.
Investors who didn't heed our advice have certainly suffered. At under $6 apiece last Friday, Iridium's shares were trading at less than 10% of their year-ago level. And the company's senior bank debt is changing hands at around 60 cents on the dollar, while the company's $1.5 billion in junk bonds is valued at 20 cents on the dollar.
Matters are about to get worse. On August 11, waivers granted by Iridium's bank lenders covering violations of various loan covenants will expire. Only adding to the pressure, on August 15, the 30-day grace period will run out for a $90 million interest payment that Iridium missed on its junk bonds.
It's anybody's guess what will happen next. Motorola, the main shareholder in Iridium, stated the alternatives rather starkly during a recent conference call with analysts. Iridium will require a major financial restructuring, whether it be in or out of Bankruptcy Court. And should any interested parties refuse to join Motorola in kicking in fresh funds, then Motorola might be forced to cut its support of Iridium, driving the satellite phone enterprise into liquidation.
So far the betting is that some agreement will be hammered out. Word circulated last week that Motorola has offered to inject an additional $400 million into Iridium if bondholders agree to swap $1.5 billion in junk debt for a 25% ownership stake in Iridium. For its part, in time Motorola would get to boost its ownership stake in Iridium from 18% to 40%. This opening offer probably won't fly with the bondholders, who will likely insist on a much larger stake in Iridium.
One thing is for sure. Any agreement between debtholders and the other parties will drive Iridium's stock price materially lower. The loss-ridden company is just too encumbered, with over $3 billion in debt, for its current stock to have much value.
And the competitive landscape is getting tougher, too. Globalstar, a rival satellite system, is just months from launch. Part of the problem is the high rates Iridium has been forced to charge to try to achieve an adequate return on its costly 66-satellite system. Iridium's phones cost customers $3,000 each, and the rates on calls can run as high as $10 a minute. Little wonder than at the end of the first quarter Iridium had only 15,000 subscribers.
Nor do the Iridium phones always work very well in cities, in mountainous terrain, in automobiles or, as a number of CNN correspondents found out during the Kosovo war, in buildings. Another problem: Far cheaper and more reliable cellular phone systems have continued to proliferate in most populated areas of the globe. Manufacturers like Bosch and Ericsson are now marketing "global" cellular phones that don't rely on an expensive satellite system but can operate about anywhere in the developed world.
Should Iridium have to be shut down and its circling satellites turned into a celestial sculpture garden, Motorola would face some $2.1 billion in financial exposure from debt guarantees, sub-contractor obligations and equipment inventories. And that's before the $400 million or whatever amount that Motorola eventually contributes to the current restructuring. Securities analysts claim that Motorola has the reserves to cover at least $1 billion of that amount.
For now, shareholders in Motorola and Iridium must hold their breath.
-- Jonathan R. Laing |
