NYPost. EVEN A DOD BOOST MAY NOT STOP DECAY OF IRIDIUM'S ORBIT
By JOHN DIZARD
TRUE pioneers pay no attention to terrible risk or
the whining of mere accountants. That's true of
lunatics as well. The trick is to distinguish between
the two groups, since both have access to the
capital markets these days.
Among the pioneers active on Friday were buyers
of stock in Iridium, the go-anywhere satellite
phone company. IRID stock went above $10 a
share, which gives it a market cap of $1.5 billion.
That's up from a recent low of around $8. At the
same time, the company's bonds are trading for
20 cents on the dollar, which means the bond
market believes the company will file for
bankruptcy in August, after it misses a coupon
payment in July.
But the Iridium bulls were willing to put faith in the
company's CFO, Leo Mondale, who was quoted
in Business Week as saying, "I don't think
bankruptcy is a viable alternative ... We are not in
as desperate a situation as people would paint."
They may not be, but it's not obvious to the
non-pioneering observer. Iridium last reported
having around 10,000 subscribers willing to pay
$3,000 for a go-anywhere phone and $5 a minute
to use it. The company has $625 million of debt
guaranteed by Motorola, $1.4 billion of junk
bonds, and $800 million in bank lines that aren't
fully drawn. That's a lot of claims ahead of the
equity.
In fact, it's the biggest disparity between the
market value of public equity and that of debt ever
recorded by my friends in the vulture
buyer/short-selling community.
But the bottom feeders were not happy on Friday.
"I can't find any more stock to sell short," said
one, in despair. "I found some put options for
sale, but the premium was so high, it was equal to
doing a short sale at $8 a share, which is also
pretty extreme."
The whisper in the telecommunications community
has been that the U.S. military would bail out
Iridium. The Pentagon has promised to be one of
the biggest customers of the Motorola-backed
company, and has built its own ground station to
get direct access to the system.
The interesting aspect of Iridium from the military's
point of view is that the satellites don't need
facilities on the ground to make the phones work.
Given that the military often is in places where the
local authorities are unfriendly to the point of being
bad hosts, this is an advantage. An expensive
advantage, since the satellites also have to have
switching capabilities on board.
"It's the greater-fool theory," says a Washington
telecom source of mine. "Since commercial users
think it doesn't make any sense, sell it to the
military."
That could work in terms of keeping the satellites
up in space and turned on, but there isn't any
reason why the military couldn't just remain a
discount customer of the bankrupt company.
The Pentagon would have to pay enough to cover
the annual cost of maintenance, operations, and
the launch of replacement satellites, and that
would be kind of expensive - somewhere north of
$750 million a year.
The company is depending on the "gateway
providers" - phone companies around the world
who connect it to the land networks - to put the
arm on the company's lenders.
But the Pentagon's interest in Iridium is its
potential independence from these gateways. In a
word, the physical plant may well be saved by
Uncle Sap, but it is hard to see where the lenders
get out with much if anything. The equity holders,
including Friday's buyers, are likely to lose their
$1.5 billion.
dizard@nypost.com
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