Everything below is a quote from BW archive. I couldn't find the figures and may now try the WSJ. I bolded/italicized some parts for you convenience. --Marty
Risks Soar, the Rockets Don't
Business Week: May 31, 1999
Department: News: Analysis & Commentary: Communications
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Risks Soar, the Rockets Don't
TABLE: Houston, We Have a Problem
ONLINE ORIGINAL: A Talk with Iridium's CFO: ''Bankruptcy Isn't a Viable Alternative' '
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Business Week: May 31, 1999
Department: News: Analysis & Commentary: Communications
Headline: Risks Soar, the Rockets Don't
Deck: The payoff in satellites keeps receding
Byline: By Andy Reinhardt in Silicon Valley, Calif., with Catherine Yang in Washington and bureau reports
Commercial satellites were supposed to be the next big bonanza in global communications--the spark for an era of whizzy new services like phone calls from the middle of the desert or Internet access from the top of Mt. Everest. Sure, the projects would be expensive: $140 billion worth of the silver birds were set to be launched in the next 10 years at a cost of $70 billion in rockets and ground services, according to the International Space Business Council. But once in space, the satellites could generate more than $150 billion a year from telephony, high-speed Internet access, and satellite images by 2008.
That was the promise. Now, for the new math. A string of rocket failures, the prospect of rising insurance costs, and more restrictive federal export policies that make it harder to launch birds abroad have changed the payoff calculations. Worse, the financial turmoil of Iridium--which spent $5 billion to launch a global phone system now used by about only 10,000 people--has investors wondering whether these grandiose business schemes can ever make money. Iridium announced on May 13 that it's in technical default on $800 million in debt, and on May 18, PanAmSat Corp. said its 1999 results will be below expectations because Hughes is late delivering satellites. For investors, ''the ardor has definitely cooled,'' says Paul H. Nisbet, president of aerospace consultancy JSA Research Inc.
DEEP FREEZE. Already it's looking much more difficult for projects to get funding. In 1998, says Donaldson, Lufkin, & Jenrette Inc., 17 satellite deals raised $6.1 billion in debt and equity. Now, the initial-public-offering market for satellite companies has gone into a deep freeze, and companies are scrambling even to float junk bonds. CD Radio, a plan to beam high-quality audio to cars in the U.S., recently raised $200 million in debt but had to pay 14.5% interest and offer warrants to back the bonds.
Some firms are paying even more: Bonds issued last July from ICO Global Communications Holdings Inc., a mobile-phone project, are now trading at a yield of 32% to 33%, says Scott D. Moskowitz, senior managing director at Bear, Stearns & Co. ''The capital markets are incredibly difficult,'' says William B.F. Kidd, an analyst with C.E. Unterberg, Towbin.
Not all projects are lost in space. ORBCOMM, a partnership between Orbital Sciences Corp. and Canada's Teleglobe, has launched 28 satellites and signed up 130 corporate clients for its messaging network, says Orbital Sciences CFO Jeffrey V. Pirone. The venture could hit revenues of $75 million this year.
Likewise, Loral's Globalstar is proceeding with its plan to wholesale mobile- phone service. It has launched 20 of 52 planned satellites and expects to begin service this year. Loral CEO Bernard L. Schwartz concedes ''investors are spooked.'' But he isn't worried about raising $600 million more for Globalstar: If lenders charge too steep a price, he says, Globalstar's partners will cough it up.
Today's rocket failures and capital flight may subside in time for other projects now being planned. Teledesic, a 288-satellite ''Internet in the sky'' backed by cell-phone pioneer Craig O. McCaw and Microsoft Corp.'s William H. Gates III, has already raised $1 billion from Motorola Inc., Boeing Co., and other sources to help with its 2003 launch. ''Our investors have a long-term perspective,'' says a spokesman.
But higher launch and insurance costs are throwing Teledesic's $9 billion budget into doubt. ''A more reasonable figure is $15 billion, but they're not willing to say that yet for fear of scaring off Wall Street,'' says Marco Caceres of researcher Teal Group. Teledesic plans eventually to go public.
Teledesic's rivals have worries, too. To jump-start its three-satellite Spaceway project, Hughes Electronics Corp. had to shell out over $1.4 billion of its own money. That could pay off big, however: America Online Inc. is considering investing up to $1 billion in Spaceway, according to sources close to both companies. Similarly, Boeing Co., once a prime contractor, is now set to take over the $1.5 billion Ellipso project, which aims to provide phone service via 17 birds in unusual elliptical orbits.
Analysts remain downbeat about phone projects like Iridium or Ellipso. But they like schemes to use satellites for high-speed broadband data communications, such as Spaceway and Lockheed Martin's Astrolink. As companies and consumers search for greater bandwidth to speed up digital communications, satellite will be seen as a necessary complement to optical fiber, says analyst Timothy O'Neil of SoundView Technology Group. And when it comes to broadband, there doesn't seem to be any reluctance to invest billions.
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Business Week: May 31, 1999
Department: News: Analysis & Commentary: Communications
Headline: TABLE: Houston, We Have a Problem
Satellite projects aren't managing to escape gravity
IRIDIUM
66-satellite global-phone system has only 10,000 customers; is in technical default on an $800 million loan; has hired DLJ to restructure debt
ICO GLOBAL COMMUNICATIONS
An IPO last summer fell short of plan; issued stock Apr. 4 was priced 40% below previous offer
ELLIPSO
To keep the project afloat, Boeing, once a prime contractor, will buy a controlling interest
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Business Week: May 31, 1999
Department: News: Analysis & Commentary: Communications
Headline: ONLINE ORIGINAL: A Talk with Iridium's CFO: ''Bankruptcy Isn't a Viable Alternative''
Deck: Leo Mondale talks about the satellite phone venture's painfully slow liftoff
Will it survive? That question has dogged Motorola-backed phone venture Iridium from the time it was first put on the drawing board more than a decade ago. But since its commercial launch in November, the $5 billion global satellite phone service has been tottering on the edge.
The 66-satellite constellation aimed to be the first phone system to work anywhere on the planet. But with $3,000 handsets and calls that average $5 a minute, even wealthy business travelers might think twice about using it.
Indeed, Iridium now has until May 31 to renegotiate the terms of an $800 million line of credit, originally predicated on more robust sales and subscriber growth than it has now. Instead of the 52,000 users bankers expected Iridium to have in this year's first quarter, the company had signed up only about 10,000. Now, Iridium's problem is casting a shadow on other satellite phone ventures yet to be launched, such as Globalstar and ICO Global Communications.
On May 18, Business Week Washington Correspondent Cathy Yang caught up with Leo Mondale, the newly named CFO of Washington-based Iridium, about the future of the company. Mondale, previously an Iridium senior vice-president for business development and strategic planning, has the been with Iridium from Day One -- he was the first employee hired by the company.
Q: Is it fair to blame Iridium for the woes of the rest of the satellite industry?
A: It's mostly fair, depending on the segment of the industry you' re talking about. Mobile satellite projects have more in common than they are different. From our experience, the transition from a plan to an operating business is no small feat. We've all spent many many years planning, planning, planning, but the skills that allow you to get up on time are regulatory, technical, and very different from the ones you need to go and sell it. We've done lot of snowplowing for the ventures behind us. For them to claim they won't face the same challenge is ridiculous.
Q: What is the capital market's appetite for satellite ventures now?
A: You see the market correcting itself. There was a time when the market was throwing money at satellite ventures. They're not throwing money at satellite ventures now. There are issues of critical mass, how many systems like this [can you have] in the first generation.
We don't have a concern about the eventual market size, but we have received a dose of reality in the form of a large bucket of cold water on how quickly these customers can be brought on. The first generation handheld mobile satellite needs to be sold. The product doesn't jump off the shelf to the customer. You have to show why they should buy one. It's not unique to Iridium at all.
Q: What's the future for the company?
A: Iridium is not going to ramp up as quickly as hoped. It will take more time. We have to examine the capital structure in light of this and ramp up accordingly.
But every customer you get tends to stay on the system. The key is the rate at which you add new customers. We're making progress on that now.
We expect the advent of real competition to help us. We've seen that with Inmarsat with our own market entry [when that older satellite phone venture picked up more customers when Iridium launched]. We attracted the attention of people to mobile satellites. But unfortunately, we were not able to meet them. We expect that to happen to us with Globalstar, which is noisily starting this summer. Serious potential customers will play to our benefit. And we'll have gotten most of thet bugs worked out at that point.
Q: Is there a market for Iridium?
A: There is a market. If you look at how long it took Inmarsat, it took them years to get the number of customers we've gotten in months. The thing we've underestimated is the time and effort it takes to find and bring customers on board. But I'm confident the market research accurately portrayed the number of people with means that live and work in areas with poor telecommunications infrastructure. I have no doubt the addressable market is very substantial. The adoption rate will be determined by how well we reorient our product and service going forward.
Q: What's your new business plan? Will you cut prices to match Globalstar' s lower-priced service?
A: We keep that to ourselves. We're looking at everything available to improve packaging and delivery.
Q: What improvements will you make in marketing?
A: We will provide models from regional distributors that have developed successful channels and share that with gateways that haven't found similar channels. Iridium North America, for example, got an existing distributor of Inmarsat services to sell Iridium with Inmarsat. We' re not expecting to take away lot of business from Inmarsat, but people who pass on Inmarsat [which sells a laptop-sized receiver] will be interested in a handheld version.
We will fix ways that products are packaged and sold. All the accessories needed including remote mount antennas, extra batteries, adapters will be packaged in the same box.
And instead of a broad branding effort to create recognition of our brand, marketing will be spent on sectors that have shown potential -- either specific geographical regions or industries. The takeup is more quick in the U.S., Europe, and developed Asia.
Q: What kind of deal should we expect by the May 31 deadline given by bankers for Iridium to come up with a new financing plan?
A: My goal is that by then, you will have heard that we've set in place a process by which banks are participating to reconsider Iridium' s capital structure and a renegotiation of the credit agreement with the banks.
We're in a situation where our ramp-up can now be reasonably forecast based on several months' operating history. And it's not appropriate to the level of debt and the terms of that debt. We're trying to adjust those credit arrangements to make them more amenable to the rampup we expect.
That said, there still is rampup, it's still significant, and we still have a good business. But it will take longer with longer-term financing and participation.
Q: Is Motorola willing to step in to give Iridium what it needs to renegotiate with the bankers?
A: I wouldn't have taken this job as chief financial officer if there were a lack of commitment on the part of Motorola and other strategic investors.
Q: Is there a chance Iridium might declare bankruptcy?
A: I don't think bankruptcy is a viable alternative for a couple of reasons. In bankruptcy, equity holders end up with the short end of stick. Equity holders happen to own all the earth stations which Iridium operates, all distribution, all the [regulatory] licenses. If they're zeroed out of a restructuring, you'd have a system that can't talk to the ground or gateway. That's why neither banks or creditors are interested in making that happen.
We're really not in as desperate a situation as people would paint. It's definitely a serious situation. But elements of a reasonable restructuring of the capital structure are there.
Q: Might Iridium be sold -- perhaps to the Defense Dept., which has signed up for Iridium phones and a new gateway in Hawaii?
A: You've got to take into account the $2 billion in equity held by the same parties upon whom we depend for licenses, distribution, and gateway operations. If you can find a way to make them happy, you can sell the company. To a large extent, we are wedded to that approach. Until that is streamlined or simplified, anything along those lines is difficult.
Q: Is Motorola thinking about retooling Iridium for another use?
A: All kinds of people are thinking about that. We have a system that carries voice and messages already.
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Copyright 1999 The McGraw-Hill Companies, Inc. All rights reserved.
By Andy Reinhardt in Silicon Valley, Calif., with Catherine Yang in Washington and bureau reports, Risks Soar, the Rockets Don't., 05-31-1999.
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