Herb backtracks> 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.
Ama-Zaniness
Yesterday's poll, in this column, questioned whether Internet time is still on Amazon.com's (AMZN:Nasdaq) side. With a remarkable 1,894 responses as of last night, (and our system won't let you vote more than once, so those are real responses) 70% said no; 30% said yes.
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Herb Greenberg writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, though he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at herb@thestreet.com. Greenberg also writes a monthly column for Fortune.
Mark Martinez assisted with the reporting of this column.
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