2/9/99 MOTLEY FOOL [Yikes!] PLATE SPECIAL on GSTRF
fool.com
An Investment Opinion
by Alex Schay
Rising Star -- Again
Shares of Globalstar Telecommunications Ltd.
(Nasdaq: GSTRF) were up $1/4 to $19 1/8 this
morning after the firm successfully launched four
satellites from Baikonur, Kazakhstan late last night
(10:54 p.m. Eastern Standard Time). With this
launch, Globalstar has finally lifted the jinx that
disintegrated 12 of its low earth orbit (LEO)
satellites back in September of last year -- when
the Ukrainian Zenit 2 launch vehicle carrying the
satellites flamed out in the upper atmosphere five
minutes after lift-off. This time around the firm
launched the satellites on a Soyuz-Ikar rocket,
bringing its total complement of orbiting satellites to
twelve.
Globalstar plans to launch four satellites a month
from here on out, until it reaches a grand total of
32 satellites in orbit by the end of July -- which
also means "the jinx" has five more opportunities to re-assert itself. The firm
wants to begin commercial service by September in the hopes of offering
800 million to 1 billion minutes per month of telecommunications
connection capacity, available just about anywhere on earth. Meanwhile,
competitor Iridium World Communications (Nasdaq: IRIDF) already
has its system in place and revealed its North American market service
providers and rental providers at the beginning of this month. Iridium
reported that it had 3,000 subscribers at the end of 1998 (with a
November 1998 roll- out), and most forecasts for 1999 put the total
between 500,000 and 600,000 subscribers.
It's vital for Globalstar to begin its service roll-out as quickly as possible,
but the tight schedule allows no room for error with respect to either launch
or in-orbit failures. If Iridium is any guide, a number of months are needed
for testing and systems integration of the complete orbiting constellation, in
conjunction with the ground segment, the handsets, and the billing system.
Still, even with commercial roll-out at the beginning of year 2000,
Globalstar looks like a fair value at the moment -- with a lot of the
operational risk already built into the price. For a discounted cash flow
analysis, check out these assumptions, made near the end of last year. As
was noted back at that time, satellite telecommunications is the final
frontier, and Globalstar is one of the major operators in this "space." Both
companies are worth a closer look.
__________________________________________________________________
<THE EVENING NEWS>. Thursday, September 10, 1998
MARKET CLOSE
FOOL ON THE HILL
An Investment Opinion
by Alex Schay
fool.com
Globalstar's Crash Course
The stock of Globalstar Telecommunications Ltd. (Nasdaq: GSTRF)
burned up $7 1/8 to $10 3/4 on earth today, in tandem with the company's
launch vehicle that flamed out in the upper atmosphere yesterday. The
Globalstar partnership announced that a rocket carrying 12 of its satellites
didn't last more than five minutes in the air before a malfunction led to the
loss of all of the satellites. Globalstar began as a partnership between Loral
Corp. and Qualcomm Inc., but after Loral merged with Lockheed Martin
in 1996, Loral's interests in Globalstar, together with its other space assets,
were combined into Loral Space & Communications (NYSE: LOR).
The crash of the Ukrainian Zenit 2 rocket (whose engine failed during
take-off), launched from the Baikonur space center in Kazakhstan, will
result in a delay of the partnership's commerical satellite communications
service roll-out until the end of 1999 -- or possibly even later.
As it is presently designed, the Globalstar satellite system hopes to offer
800 million to 1 billion minutes per month of telecommunications
connection capacity and will ostensibly be available just about anywhere on
earth (excluding use by polar bears and some mariners in the middle of the
ocean). The system is a low earth orbit constellation (LEO) consisting of
48 satellites along with eight orbiting "spares," which can be used as
replacements for any of the primary 48 if one or more should fail. Too bad
the partnership only has eight satellites floating around in the ether now,
which should indicate to readers that the launch of these twelve satellites
(representing 25% of the core grouping) was actually a crucial portion of
Globalstar's initial infrastructure build. Many analysts are saying, "I told you
so" today after voicing concern about the partnership's strategy of putting
too many costly eggs into one potentially unstable basket -- even though
the Zenit fail rate up until yesterday was only 10%.
Planned Calendar of Scheduled Launches
Launch Launch Launch Number of Launch
Date Vehicle Provider Satellites Site
2/14/98 Delta Boeing 4 Cape Canaveral, FL
4/24/98 Delta Boeing 4 Cape Canaveral, FL
3Q98 Zenit NPO Yuzhnoya 12 Baikonur, Kazakhstan
4Q98 Zenit NPO Yuzhnoya 12 Baikonur, Kazakhstan
4Q98 Zenit NPO Yuzhnoya 12 Baikonur, Kazakhstan
1Q99 Soyuz Starsem 4 Baikonur, Kazakhstan
1Q99 Soyuz Starsem 4 Baikonur, Kazakhstan
2Q99 Soyuz Starsem 4 Baikonur, Kazakhstan
(Company Data)
The partnership's initial assessment of the situation is that it could "resume
its launch campaign aboard the Soyuz as early as November" and that it
only needs 32 satellites to operate an effective service -- Globalstar has
another 14 satellites ready to go in Kazakhstan with an additional 16
undergoing tests. The November Soyuz rocket can carry 4 satellites, and
Globalstar estimates that it can get 36 birds up and flying by May of 1999.
Among the "recovery alternatives" Globalstar has in place is a stepped-up
pace of launches that were initially contracted for Soyuz and Delta 2
rockets, as well as the launch of additional satellites on the Zenit 2 --
assuming a launch failure investigation doesn't reveal any structural issues
that jeopardize the relationship. Analysts aren't waiting around though --
and some mandatory downgrades to "hold" occurred today due to the lack
of launch visibility and other questions related to the revenue push-out in
1999.
Globalstar estimates that yesterday's blow-up will cost it $85 million
associated with amending its launch schedule and will cut into 1999
estimated revenues by about $300 million. With the $15 million dollar
satellites fully insured (that estimate puts the total loss at $180 million
without the launch costs, which will also probably mean industrywide
insurance rates will go up), the insurance investigation will probably take
some time and Globalstar will need a cash infusion -- probably from
pseudo-parent Loral Space & Communications, which also has a pseudo
obligation to Globalstar by virtue of owning 42% (Loral CEO Bernard
Schwartz is also CEO of Globalstar). Loral dropped $5 1/16 to $13
today.
Overall, funding has gone well for the venture. The Globalstar system's total
cost thus far has been estimated to be around $2.8 billion, and in mid-May
the partnership locked in the "final" $275 million through a private
placement of 11.5% senior notes due June 1, 2005. Incidentally,
Globalstar's 11 3/8% bonds due in 2004 fell about 15 points ($150 per
$1000 face value) to $650 today. Contained within that $2.8 billion total
are design costs, construction and deployment of the Globalstar System,
working capital needs, cash interest on borrowings, and operating
expenses. The system, once up and running, will be composed of four
segments: Space Segment, Ground Segment, Communications Technology,
and Handsets.
OK, so what about the future and the company's current valuation? While
it's easy to knock the discounted cash flow analysis, those that do miss the
investing point entirely. It's a necessary step in attempting to get a handle on
the expectations that are currently built into a stock. While the following is
an "uneducated" guess in terms of the EBITDA potential and the discount
rate for Globalstar, it still has some value as a basis for monitoring
expectations -- either higher or lower.
Globalstar LP Discounted Cash Flow
*figures in thousands 1998 (end)
Terminal Value @ 8x Consolidated EBITDA
Year 2005 $20,500,000,000
Discount rate 25%
Sum of Free Cash Flow at PV $2,000,000
Add: Terminal Value $4,299,161
Total Value $6,299,161
Less: Debt, Plus: Cash, Plus: Option Proceeds, Plus: Warrant Proceeds,
Plus: Conversion Of Preferreds =
Net Asset Value $5,711,883
Fully Diluted Shares Outstanding 82,007
Private Market Value Per Share $69
Target Discount to Net Asset Value 40%
Target Price Per Share $41.40
Closing Price Today $10 3/4
Play with some earnings scenarios for yourself and you'll probably see that
an investor with a 5-year time horizon might take today's drop as an
attractive opportunity. After all, satellite telecommunications is the final
frontier, and Globalstar is one of the major operators in this "space."
Competing systems are not just going to appear overnight.
Technological advances in battery power and digital compression
techniques coupled with lower manufacturing costs of the satellites
themselves have all contributed to the changing economics of the satellite
industry. With satellite projects like Iridium and Globalstar slated for
full-scale implementation before the end of the millennium, a host of issues
related to the coming rollout are now working themselves out (like Iridium's
delayed launch and Globalstar's crash course). Satellite systems are
burdened by horrendous start-up costs; however, the promise of low
operating expenses and significant cash flow once the systems are in place
act as financial balm to both investors and financiers. |
