Will Globalstar be the next satellite casualty?
(via G* yahoo thread)
[Note: The article contains some inaccurate comments, including that Soros sold 75% of his stake. djane]
iionline.com
By Garrett Bekker (8/31/99)
After spending several months in a downward spiral,
Iridium (NASDAQ: IRIQE - Quotes, News, Boards),
a satellite communications vendor, declared bankruptcy
on August 13th. After the close of trading on Friday, ICO
Global (NASDAQ: ICOGF - Quotes, News, Boards)
followed suit, seeking protection from its creditors. That
helps explain why shares of competitor Globalstar fell
$2.19 on Monday to $26.69.
But GlobalStar has a number of important advantages
vis-…-vis Iridium that improve its chance of succeeding.
Most important of which is price. Globalstar users will be
asked to shell out half the price to make calls, when
compared to Iridium?s pricing structure.
Still, the road ahead is filled with speed bumps. We think
the time has not yet arrived for these services, and
Globalstar faces an uphill battle (Editor?s note: Not all of
our writers necessarily hold the same investment opinion
on a given stock. Individual Investor Online columnist
Tom Byrne wrote a bullish piece about Globalstar in May.
Since then the stock has gained about 50%).
As documented in a series of recent columns, Iridium was
essentially engaged in a race against the finance clock.
Due to the high cost of launching the constellation of 66
satellites required to initiate service, Iridium groaned under
an enormous debt load of nearly $3 billion. To service this
debt, Iridium needed to rapidly sign up customers.
However, due to a host of operational and managerial
miscues, subscriber growth was abysmal; despite initial
interest from over one million potential customers,
subscribers totaled less than 20,000, a far cry from the
600,000 required to break even.
Globalstar is facing a race against the clock of its own.
With no current subscribers and a huge debt load of its
own ($3.9 billion), the burn rate is equally frightening.
Although Globalstar secured a $500 million bank line of
credit, Marc Nabi of Morgan Stanley states that
Globalstar is only fully funded through October. This begs
the question: what are the chances of returning to the well
once it runs dry?
The adverse publicity surrounding Iridium has all but dried
up capital flows for other satellite telcos, which
undoubtedly was a contributing factor in ICO?s decision
to file for Chapter 11. CIBC analyst Jeff Wlodarczak
points out that ICO twice failed to raise $500-$600
million, and still needed another $1 billion (for a total of
$4.8 billion) to initiate service. Complicating matters is that
Y2K fears are also expected to have a dampening effect
on capital markets going forward.
No Laughing Matter
What this means is that, like Iridium, subscriber growth
is crucial for Globalstar. Once it launches service in
October, the company hopes to have 10,000 subscribers
by the end of 1999. From there Globalstar is forecasted
to have 1.3 million paying subscribers by the end of next
year. Morgan Stanley is forecasting 975,000 subscribers
by 2000 and 2.6 million by 2002.
Forecasted is the operative word here. Industry veteran
Inmarsat, for example, has only 140,000 users after 20
years in the business.
And even though Globalstar?s phones ($1,100) and
services ($1.50 to $3.00 per minute) are cheaper than
Iridium?s offerings, retail prices will still be higher than
comparable wireless services. For example, Gilat
Satellite (NASDAQ: GILTF - Quotes, News,
Boards) offers a $0.15 per minute rate for fixed wireless
customers in remote areas. Furthermore, should AT&T?s
(NYSE: T - Quotes, News, Boards) new cellular
pricing plan provoke a price war, satellite service will
appear even less appealing on a relative basis. To its
credit, Globalstar could reduce wholesale prices as low as
14 cents a minute and still break-even according to ING
Barings, a huge advantage when compared with $1.37 for
Iridium.
What this means is that for the foreseeable future, satellite
telephony will likely remain a marginal business,
complementing, rather than competing with, cellular. As
was the case with Iridium, Globalstar will be relegated to
serving customers in remote areas where it would be too
expensive to build out a cellular or wireline
communications network. John Coates of Salomon Smith
Barney sees satellite penetration of the overall
telecommunications market totaling only 2% to 3% in the
next 10 years. Investors who dreamed of a day when
satellite phones would rule the roost may have a long wait.
The wild card in this whole analysis concerns the demand
for such services. Coates points out that if we consider
that Iridium had 20,000 customers at $3 per minute to $7
per minute, and that cellular services have 300 million
users at roughly $0.20 cents per minute, then we can
conceptualize a demand curve for the satellite telephony
market. Globalstar currently falls somewhere in the
middle. Obviously, as you move further down the demand
curve, the size of the potential market for Globalstar
should grow. However, there?s really no way to forecast
the shape and slope of this curve. In other words, it?s
anybody?s guess as to how quickly customers will
respond, nor how low prices will have to fall to meet
those customer targets.
Despite the Monday morning sell-off, shares of Globalstar
have more than tripled from their 52-week low of $8.31.
But more selling pressure could come on the heels of
word that George Soros recently sold nearly three-fourths
of his previous 10% stake in the company, and if Soros is
sellin?, we?re not buyin?.
Bottom Line:
Although Globalstar has undoubtedly learned something
from Iridium?s mistakes, it still faces the same hurdles.
Globalstar is also racing against the clock, and unless
everything falls exactly into place, it will suffer the same
fate. We think the stock is highly risky and would avoid it
for now.
Tell us what you think in GSTRF's Board
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