Questions about Iridium growth cited as possible cause for sharp slide in stock price
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msnbc.com
Iridium may not
hit growth targets
Wall Street worries over terms
of bank covenants
By David Bowermaster
MSNBC
Feb. 22 — There is widespread concern on Wall
Street that Iridium World Communications Ltd.,
the satellite phone and paging service, will not
meet minimum revenue and subscriber targets
outlined in bank covenants that the company
agreed to in December. The worries have
knocked Iridium shares down over 20 percent, to
a 52-week low of $24 3/16, over the past two
trading days.
RUMORS THAT IRIDIUM might break the covenants
first hit Wall Street Friday, according to a research alert
issued today by Armand Musey, a satellite analyst with C.E.
Unterberg, Towbin. Under the agreements reached in
December, Iridium must have $30 million of accrued
revenue and 27,000 subscribers by the end of the first
quarter 1999.
"What the market is saying is this company is not going
to make their targets," said one satellite analyst, speaking on
background. He also said that Iridium should be able to
renegotiate the covenants if the milestones are missed. "The
banks have zero interest in throwing Iridium into default,"
the analyst said.
At the end of 1998, Iridium had accrued revenue of
$186,000 and 3,000 subscribers. Iridium launched its
service commercially on November 1, 1998.
Iridium agreed to the covenants as part of a $1.55
billion bank facility arranged by Chase Securities Inc. and
Barclays Capital, a division of Barclays Bank PLC.
Motorola, which built Iridium's satellites and gave birth to
the company, guaranteed $750 million of the total.
Motorola also provided $400 million of additional vendor
financing to Iridium.
Iridium and Motorola did not immediately return calls
seeking comment.
Iridium's chief financial officer, Roy Grant, told at least
one analyst on Friday that the company is not in negotiations
with the banks to change the terms of the covenants. Grant
did not predict, however, whether or not the covenants
would be met.
Iridium stock is now off more than 64 percent from its
52-week high of $72 per share, which it reached last May
after successfully launching its 66-satellite communications
network.
Since then, Iridium has been hurt by a later than
expected product launch (originally scheduled for
September 1998); difficulties getting handsets to customers;
and reports of satellite failures, even though such failures
were anticipated by Iridium's original network plans.
Iridium addressed at least one of those problems last
week when it announced that handsets manufactured by
Kyocera Corp. of Japan are finally ready to ship. Motorola
and Kyocera are the sole suppliers of Iridium handsets, so
customers in many important markets — including Japan —
have been unable to get handsets until now.
Despite the recent difficulties, John Coates of Salomon
Smith Barney says he still has a long-term buy on Iridium —
and the entire satellite communications sector.
"The market is penalizing Iridium without giving them a
chance to prove that demand exists" for their service, says
Coates.
Musey of C.E. Unterberg, Towbin also maintains a buy
on Iridium, though he expects demand will not rise as fast as
the company expects.
"We continue to expect 210,000 subscribers by
year-end 1999 vs. company goal of 500,000 to 600,000
subscribers," Musey said Monday.
MSNBC © 1999
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