IBD. Iridium Tries To Stay Afloat By Cutting Prices On Service
Date: 6/22/99
Author: Reinhardt Krause
In a last-ditch effort to avoid bankruptcy, debt-laden Iridium LLC cut
prices by up to 65% Monday on its satellite-based phone and paging
services.
Iridium initially charged subscribers from $2 to $7 per minute, much higher
than standard cellular services. Effective July 1, most Iridium calls will be
$1.50 to $3 per minute. The company also plans to simplify customer
billing. And lighter, cheaper satellite phones could ship in early 2000.
Iridium hopes the overhauling of its sales strategy persuades investors such
as Motorola Inc. and lenders not to abandon ship. Iridium also is proposing
a restructuring plan to debt holders later this month. The big question is
whether banks, bondholders, Motorola and other strategic partners can
agree on a plan that avoids bankruptcy, analysts say.
In a conference call Monday, Iridium Chief Executive John Richardson
tried to exude confidence.
''I'm encouraged by the progress we've made in negotiations,'' he said.
''Motorola clearly (has) pragmatic business people. . . . I'm hoping we'll
drive all the constituent parties to a broad consensus towards the end of
this month or early in July.''
Iridium has fallen far short of revenue and customer targets set by lenders
financing its $5 billion network of 66 communications satellites. Iridium
guarantees connections to the most remote areas of the planet, but now
finds itself trying to lower costs and improve distribution. The company cut
15% of its 550 workers in June.
Iridium hopes that reducing per-minute air-time charges and phone costs
will help jump-start subscriber growth.
''The greatest, most immediate needs for our products and services are in
the industrial markets,'' Richardson said. Richardson replaced a former
Motorola executive, Edward Staiano, as Iridium's chief in April.
The company now plans to focus on government agencies, as well as
industrial users like oil and gas or maritime firms. Iridium had targeted
international business travelers.
Iridium had signed up 10,295 customers though the first quarter of 1999 -
one-fifth the target it set when starting service in November. It posted a
quarterly loss of $505 million in the first quarter.
On March 31, the start- up was in technical default of an $800 million bank
loan. A series of monthly waivers reset the subscriber target to 27,000
users by June 30.
Because of Iridium's heavy debt load, analysts say a struggle has been
under way in dealing with creditors. In the event of bankruptcy, banks are
first to be repaid, bondholders are second and equity holders are last.
''The key question is whether this will be a restructuring out of bankruptcy
or in bankruptcy,'' said Thomas Watts, analyst at Merrill Lynch & Co. ''We
think there's a possibility of doing it without going into bankruptcy, but it
requires everyone to play along. Some parties are playing hardball.''
Watts says resolving Iridium's restructuring issues could put more pressure
on its share prices.
Banks and bondholders likely would get more equity warrants in Iridium in
return for renegotiating loan terms. That could lead to substantial dilution for
existing shareholders, who have seen Iridium's stock fall more than 85%
from its May 1998 high of 68. Iridium already faces lawsuits from
shareholders.
Motorola, a maker of wireless equipment and phones, owns 18% of
Iridium. Motorola led an 18-member consortium that formed the satellite
venture in the early 1990s. Iridium's other partners include Sprint Corp.,
Lockheed Martin Corp., Germany's Veba AG and several overseas
state-owned telecom firms.
Motorola has guaranteed much of Iridium's bank debt. Lenders may ask
Motorola to guarantee more debt as part of Iridium's restructuring.
Salomon Smith Barney Inc. estimates Motorola's potential exposure to
Iridium at $1.5 billion to $2.2 billion. Motorola may be throwing good
money after bad if it funds Iridium further, some analysts say.
Schaumburg, Ill.-based Motorola is giving signs it isn't ready to throw in the
towel. It is providing Iridium with more salespeople and engineers. On
Monday, it reduced wholesale prices for satellite phones it supplies to
Iridium.
Current models, also made by Japan's Kyrocera Corp., cost subscribers
$2,200 to $3,000. Iridium says it expects the cost to fall to $1,000 with
special retail deals.
Motorola is tight-lipped about its Iridium plans. Motorola wants other
partners to offer more credit support.
''In July, we would know what the banks will do, whether there's another
(loan) extension,'' said Motorola spokesman Scott Wyman. ''Any
additional support would be contingent on the other major constituents
(equity partners) also taking part.''
Another factor in Motorola's decision is the credibility of Iridium's new
business plan.
The satellites have an estimated life span of five to seven years, though they
could last longer. That's pressuring Iridium to make up for lost marketing
time.
Analysts say some potential customers could be delaying orders until
Iridium's financial picture clears up.
Merrill Lynch says Iridium could sign up 68,000 subscribers by year-end,
down from its earlier forecast of 242,000. It estimates 193,000 customers
in 2000 if Iridium solves its problems.
Industry estimates on Iridium's break-even point have ranged from
300,000 to 500,000 subscribers.
(C) Copyright 1999 Investors Business Daily, Inc.
Metadata: IRID MOT FON LMT E/IBD E/SN1 E/TECH |
