From thestreet.com
Why Some Investment
Pros Are 'Bonding' With
Globalstar
By Herb Greenberg
Senior Columnist
9/1/99 6:30 AM ET
So, yesterday's item, er,
paragraph, here on
Globalstar
Communications
(GSTRF:Nasdaq) didn't go over well with the
masses. Actually, the Hostile React-O-Meter barely
budged, thanks to the level-headedness of most
emailers (at least as of this writing!). The biggest
complaint was that I had a lot of nerve writing that
the company could have a hard time raising cash in
the current environment, when it just received a
$500 mil credit line from Bank of America
(BAC:NYSE).
True, but the credit line was backed by a guarantee
from Globalstar's co-founder and biggest
shareholder, Loral (LOR:NYSE), much the way
Iridium's (IRIDQ:Nasdaq) credit was backed by
Motorola (MOT:NYSE). And you see what good
that did Iridium! And the cash will only last so long.
"As an analyst covering this sector, it has amazed
me how this stock has maintained value," says Tim
O'Neil of Soundview Technology Group. "If
dozens of very educated in-country service providers
such as Korea Mobile Telephone and Iridium
Italia have decided not to invest any more money in
mobile satellite communications (Iridium and ICO
Global Communications (ICOGF:Nasdaq)), what
makes investors think Globalstar can find a market?
This isn't dumb Wall Street money we're talking
about; this is strategic smart money that knows the
customers."
Still, you'll find little argument -- even with this
column's original Iridium skeptic, who was quoted
here yesterday with a bearish bent on Globalstar --
that Globalstar has the best chance of any satellite
phone company of succeeding. Even so, our Iridium
skeptic, like quite a few other professional traders I
know, isn't taking any chances. While they're short
Globalstar, they're also long the Globalstar bonds.
"The bet you're making is that if the company fails,
the stock goes to zero but the bonds (now trading
at around 67) don't go to zero. They go to 25 or
something," says analyst Blake Carter of Tejas
Securities Group, an Austin, Texas, brokerage
firm. Carter, who is recommending that strategy,
adds: "So, on a short position, you're making a
100% return on your capital, but on your long you're
only losing 50% or 75%, and you're also clipping
the coupon (now 23 1/2%) as long as it's continuing
to be paid."
What's more, in the event of a bankruptcy, don't
forget that bondholders have a senior claim on the
company's assets. That would mean stock in a
reorganized Globalstar would in all likelihood go to
them, not existing stockholders.
But nobody's talking bankruptcy of Globalstar. So,
what happens if it actually does well? The bonds
will rise. And considering that they once traded for
more than 100, there's a chance "you'd get at least
a 50% increase in capital plus interest," Carter
says. However, no strategy is without risk, and the
risk here is that you'd be left with a hefty short
position in a stock that is rapidly rising. To avoid a
wipeout, some traders might hedge their bets by
being long, say, twice as many bonds as the
shares they're short. (Remember, it's never this
simple so don't try this at home.)
What does Carter think will happen with Globalstar?
He isn't sure, but it's interesting to note that while
he's recommending going long Globalstar's bonds
and short its stock, he had a sell on Iridium's stock
and bonds. A big difference with Globalstar, he
says, is that it doesn't have as much bank debt, in
addition to the bonds, as Iridium had. "The other
thing is the question of viability. I feel a lot more
confident in Globalstar than Iridium because of a
number of reasons, including its management, the
logic behind its business plan, the logic behind its
distribution strategy, its branding strategy and the
way they designed their satellite constellation."
So, why not go long the stock? Because Globalstar
has a market value of around $6 billion, thanks to
its stake in Globalstar L.P. "To sustain that
valuation, the company needs to start (rolling out its
service) on time and needs to meet Wall Street's
expectations in terms of subscriber additions."
While he thinks Globalstar will be infinitely more
successful than Iridium, he thinks it'll have a hard
time meeting Wall Street's estimates, "and we all
know what happens when Wall Street's estimates
aren't met," he says.
Yup. The stock prices come back to earth. Which
is why he owns the bonds.
Regards
Neil |
