Investors Betting on Globalstar: Rates of Return
Bloomberg News
August 31, 1999, 3:18 p.m. PT
New York, Aug. 31 (Bloomberg) - Bernard Schwartz, head of
Globalstar Telecommunications Ltd., expects to collect on a $200 bet made over dinner a year ago with the chief executive of Iridium LLC, a rival satellite phone company.
That's good news for bondholders, who could collect far more
if Globalstar makes good on Schwartz's wager and starts
operations on time next month. Edward Staiano, the Iridium
executive who made the wager, resigned in April as Iridium
stumbled towards bankruptcy court, where it was joined last week by ICO Global Communications Inc., another satellite phone company.
The 73-year old Schwartz, a 26-year veteran of the satellite
business, is confident enough to schedule demonstrations of Globalstar's telephones to investors next week.
Globalstar's bonds fell about 16 percent since January,
though their price of 67 cents on the dollar is high enough to show that ``people are giving Globalstar the benefit of the doubt,' said Charles Ullerich, who helps manage $1.1 billion of bonds at Pilgrim America Group in Phoenix.
Iridium's notes plunged as much as 85 percent this year and
are now trading in the mid-teens while bondholders and other
investors negotiate a plan to keep the company in business.
Globalstar's notes ``could shoot up to the mid-80s range by
November if the company proves it can sign up subscribers,'
predicts Phelps Hoyt, an analyst at KDP Investment Advisors in Montpelier, Vermont. He recommends investors hold the notes.
While Globalstar must still prove there's enough demand for
satellite phones to sustain its business, investors say they are encouraged because Globalstar's system is less expensive to operate than Iridium's, and allows Globalstar to charge lower rates with cheaper phones.
`Confidence'
``Whether we're right or wrong, we'll know in three or four months,' said Schwartz, also the chief executive at Loral Space& Communications, Globalstar's biggest shareholder with a 45 percent stake. ``But the closer we get, there's a general feeling of confidence that we're going to make it.'
Globalstar's shares nearly doubled the past year to 25 1/2,
in another vote of confidence. Iridium stock, meanwhile, fell 91 percent to 3 1/16 and ICO dropped 67 percent to 3 5/8 before trading was halted for both companies.
One of Globalstar's big advantages over its rivals is that
it already has the $3.8 billion needed to start operating its 48-satellite network. The company, which arranged a $500 million loan agreement with Bank of America earlier this month, says that loan, plus some financing from vendors, is enough to operate until the fourth quarter of 2000, when it expects cash revenue will exceed cash expenses.
Financial problems were the undoing of Iridium and ICO.
Iridium, which filed for bankruptcy protection Aug. 13, couldn't make interest payments on bank loans and bonds due earlier this month. The company, whose biggest backer is Motorola Inc., failed to attract enough users to its 66-satellite global phone network.
Bankruptcy
At $3,000 each, Iridium's phones were too expensive, and it
launched a $140 million advertising and marketing campaign
before the phones or satellites were ready. As it fell short of
goals for subscribers, top executives left the Washington D.C.-
based company and prices of its bonds and stock plummeted. Price
cuts and a new marketing effort weren't enough to forestall
bankruptcy filings by the company and some of its bond investors.
London-based ICO landed in bankruptcy court before any of
the satellites in its proposed $4.6 billion system were launched.
ICO sought in vain to raise $600 million from outside investors
to continue building its system and was also turned down by
existing shareholders who were offered a chance to put another
$500 million into the company.
Investors say ICO could liquidate its business soon, giving
Globalstar a leg-up as potential competitors shrink to one.
``Globalstar should seize the opportunity to not repeat
Iridium's mistakes,' said Les Levi, telecommunications analyst
at Chase Securities Inc. in New York. Wall Street's analysts and
investors ``have had more confidence in Schwartz's management
than in any of Iridium's management right from the beginning.'
Globalstar's phones cost between $800 and $1,200 initially,eventually dropping to about $750 as production increases,Schwartz said. With a $40 million advertising budget for the next 12 months, the company is aiming at markets such as fishermen and workers in remote areas rather than the well-heeled business travelers Iridium tried to attract.
Iridium recently tinkered with its customer profile to
encompass Globalstar's target audience and slashed its phone
prices as much as 65 percent from $3,000 to win customers.
`Biggest Lesson'
``The biggest lesson I think we've learned from Iridium's
problems is that our conservatism in our business plan was
right,' said Schwartz. ``We have been right not to introduce our service prematurely or to build up expectations that we're not 100 percent certain we can achieve.' Schwartz expects 1 million customers by the end of 2000 and 3 million by 2002.
Iridium, with about 20,000 customers according to its latest
statements, fell far short of the customer base it promised its
bankers. It expects 500,000 customers by the end of the year.
While both Globalstar and Iridium use satellite networks,
there are differences in their approach, which give an edge to
Globalstar, investors say. Globalstar makes more use of the
existing wireless networks on the ground, while Iridium's system
is more exclusively satellite based.
Satellite Orbits
Iridium's satellites cost more, and because they orbit the
earth at a lower altitude than Globalstar's, their average life
is about five years compared with seven for Globalstar. Each of
Iridium's so-called ``smart' satellites has a phone-switching
system that can bounce a signal from one satellite to another
without ever touching the ground. Globalstar's satellites are
designed to forward calls to switching systems on the ground that
are linked into local phone networks.
Besides its mobile phones, which have local and global
roaming capabilities for areas where there isn't cellular
coverage, Globalstar plans to sell fixed telephones for use by
businesses in remote regions |
