ChicagoTrib. IRIDIUM TO STAVE OFF $800 MILLION DEFAULT WITH RESTRUCTURING
By Andrew Zajac
Tribune Staff Writer
May 28, 1999
The corporate handlers of the Iridium satellite phone
system are expected to announce an agreement Friday
with creditor banks that will stave off a Monday default
on $800 million in loans.
Iridium LLC's chief financial officer, Leo Mondale, said
Thursday that the company isn't considering bankruptcy
and expects to work out a debt restructuring agreement
that will allow the 6-year-old Washington, D.C.-based
Motorola Inc. spinoff to continue operating.
"I think the situation we're in now is one we can get out
of," Mondale told a telecommunications investment
conference in New York.
Late in the day, Iridium spokeswoman Michelle Lyle
said the company will disclose debt restructuring
arrangements on Friday.
Buoyed by Mondale's remarks, shares of Iridium World
Communications Ltd., Iridium's investment vehicle,
closed up $1.25 at $8.81. The stock dipped to $7.56
on Wednesday, far off the $72.19 it fetched last May.
Any deal with banks, however, would merely buy time
for Iridium to find an answer to the central question
confronting the world's first global hand-held phone
service: Who wants it?
In 1998, Iridium lost more than $1 billion. At the end of
the first quarter of this year, Iridium had pulled in only
about 10,294 customers, one-fifth of the 52,000 it
needed to pacify creditors before Friday's anticipated
bailout.
Iridium's first target market, jet-setting businesspeople,
looked at the bulky $3,000 phone, which resembles a
brick crowned by a bread stick and costs $2 to $7 per
minute to use, and wrinkled their noses.
The first seven months of operation have amounted to a
dismissal of some seductive math put forth by the Iridium
marketing department. The company calculated that 40
million cell phone users travel and make enough money
to afford an Iridium phone. Iridium needed to sign up
barely more than 1 percent of those mobile phone
consumers--about 600,000--to break even.
A litany of technical and sales problems bollixed that
straightforward scenario.
Iridium phones didn't work well inside buildings. Major
distributors, rattled by the phones' shaky introduction,
held off promoting them. Billing was difficult to
understand. Salespeople lacked training to explain the
quirks of the service.
"A lot of consumers expected it to be like cellular, only
better. They needed education," said William B.F. Kidd,
who tracks the satellite business for C.E. Unterberg,
Towbin in New York.
Perhaps most significant, during most of the 1990s, as
engineers busied themselves designing and launching
Iridium's constellation of 66 satellites, the world's cellular
and wire-line networks were expanding, cutting down
on the portion of the earth uncovered by a terrestrial
phone system.
Iridium ad-libbed, shifting the emphasis of the marketing
of the service from a critical must-have to a hip
accessory. "They tried, 'Hey look, I'm using a satellite
phone,' " observed Polina Ialamova, of Madison
Securities in Chicago.
But the traveling, upscale would-be customer was
"completely turned off," Ialamova said. "You have to
have the product to attract them, even if you're going
after 1 percent of the market."
Executive instability has added to Iridium's woes. The
company's CEO and the vice president of marketing, as
well as Mondale's predecessor, all left earlier this year.
Although the picture is not pretty, Iridium shouldn't be
judged too harshly, because it is, in effect, creating a
new kind of business for which there are no measuring
sticks, cautioned telecommunications analyst Jeffrey
Kagan, of Kagan and Associates in Atlanta.
"When you're creating a new category, you don't have
anything tangible to base projections on. Yet that's what
Wall Street, analysts and reporters demand. So you've
got to come up with something," Kagan said.
"It's the dichotomy of a startup," Kagan said. "You've
got to generate excitement" with rosy projections, "but
those claims can come back to haunt you."
Iridium has promised a new business plan that will
include lower prices for the phone as well as reduced
per-minute charges. Mondale reportedly told analysts on
Thursday that prices will be comparable to charges by
the Inmarsat satellite phone. Inmarsat requires a
suitcase-size phone and utilizes satellites positioned
much higher in the heavens than Iridium's constellation,
so there is a latency or delay between when a caller
speaks and a listener hears what has been said.
Satellite industry analyst Armand Musey, of Bank
America/Montgomery Securities in New York,
estimated its charges at between $2.20 and $3 per
minute.
Iridium also has begun trolling for customers beyond its
original target pool of well-heeled corporate wanderers.
The company is looking to governments, oil-exploration
concerns and agricultural firms, all of which tend to have
operations in parts of the world where phone service is
unavailable.
Anxiously watching is Motorola, which founded Iridium,
still owns 19 percent of it and is the project's chief
contractor and the main guarantor of the $800 million in
financing that has been at risk.
"We believe Iridium is taking the right steps in shifting its
marketing from businesspeople and international
travelers to vertical markets," said Motorola spokesman
Scott Wyman. "Iridium's (satellite) system is ours. We
want it to succeed."
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