Lagging Globalstar
Calls On Creditors
To Let It Buy Time
By Peter Benesh
Investor's Business Daily
With only 31,200 subscribers for its satellite phone service, which needs about 1 million subscribers to break even, Globalstar Telecommunications Ltd. is trying to "buy time."
Chief Executive Bernard Schwartz used that exact phrase on Tuesday as he pleaded with creditors to grant the company a stay of execution. Schwartz dodged the words on the lips of analysts: default and bankruptcy.
Call it buying time, defaulting or whatever, Globalstar on Tuesday said it will stop paying its dividends and repaying loans, and will rewrite its business plan within six weeks. Schwartz promised that employees and suppliers will be paid.
Will creditors let the company buy time? Though its two major creditors have agreed, some analysts still think it’s unlikely.
It takes only three bondholders to push a company into the courts, says Mark Kaufman, an analyst with RBC-Dominion Securities in Greenwich, Conn. And, he said, they can "pick the jurisdiction that they feel would be more sympathetic to creditors than the debtor."
Schwartz says Globalstar has about $200 million in the bank. He said that could tide the company over until early 2002 if it stops paying its debts and dividends.
Similar problems occurred at Iridium LLC, the other company that tried to do what Globalstar is doing. Both companies launched satellites as the key to their wireless networks.
A Costly Service
The problem is that satellite cell phones are much more expensive than land-based cell phones. The satellite service also is more costly, especially as prices of traditional wireless services have fallen fast. On the other hand, unlike land-based wireless networks, the satellite service will work anywhere.
Iridium failed, and its assets were sold for $25 million in November. It cost $5 billion to build its network.
Globalstar has something else in common with Iridium — a blurred line distinguishing it from its parent. Motorola Inc. backed Iridium. Investors thought Iridium and Motorola were one and the same, Kaufman says.
To some investors, Globalstar and its biggest backer, Loral Space & Communications Ltd., are one. Loral owns more than 47% of Globalstar, Kaufman says. "Creditors will attack the fact that Schwartz is the chief executive of both companies," he said.
Kaufman says courts could be asked to decide whether Globalstar is a separate entity from Loral. "Creditors will say that they thought they were lending to Loral because Schwartz was head of both companies," he said. "They could claim fraudulent conveyance."
Jimmy Schaeffler, head of research firm Carmel Group, says Globalstar’s salvation could be its link to Loral. "These lenders and big vendors want to be long-term clients of Loral," he said. "They’re going to be real patient unless being patient puts them in an untenable situation.
"If anybody can pull this off, it’s Bernard Schwartz. He can make the Wall Street community work for him."
Qualcomm Backs Move
Globalstar’s burden will be to convince people to subscribe to a satellite service that could be out of business in a year, Schaeffler says. "But it ain’t over till it’s over," he said.
Schwartz’s announcement was "consistent with what we’ve been expecting," said Mark Roberts, an analyst with First Union Securities in Palo Alto, Calif. "We assumed Globalstar would be going bankrupt."
He says Schwartz’s bid for more time makes sense. "If I were management, I’d be doing everything I could to try to figure out a way to keep this thing afloat," Roberts said. "But the fundamental business model is flawed." He said Globalstar couldn’t generate enough money to recoup costs.
The other big Globalstar backer is Qualcomm Inc., with a 7% stake. Qualcomm supplies Globalstar handsets in the U.S. market.
Qualcomm backs Globalstar’s move. "We believe current and new product offerings support an expanding market for Globalstar service, and we expect the system to continue to operate into the future," Qualcomm Chief Executive Irwin Jacobs said in a statement.
But if the other creditors nix Schwartz’s plan, what could happen to Globalstar?
"From an operating standpoint, I don’t believe it costs an enormous amount of money to maintain the satellites in operating order," Roberts said. He says the big winner could be the government. The Globalstar system, he said, could "wind up being a bargain for the government for pennies on the dollar."
Robert suggests that some companies might be interested in buying the system for a communications network, or perhaps as a global point-of-sale network.
Another possibility, Kaufman says, is the Boeing Co. might want Globalstar. It now operates Iridium for its new owners. Globalstar hopes to put Internet and phone service on commercial and private aircraft. Boeing could find that a natural fit.
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