November 18, 1999
Tech Center
Rejecting the Party Line, Craig McCaw
Chooses to Bet Big on Satellite Phones
By SCOTT THURM
Staff Reporter of THE WALL STREET JOURNAL
What does Craig McCaw know -- or think he knows -- that no one else
does?
The question hangs in the air as Mr. McCaw begins investing as much as $1
billion to rescue the bankrupt ICO Global Communications Ltd.
satellite-phone system.
Mr. McCaw is buying into the satellite-phone arena
just as everyone else is bailing out of satellite deals.
The bankruptcy-court filings of ICO and competitor
Iridium LLC have convinced investors that
satellite-communications projects are too expensive,
take too long and have too small a market to make
money. The "Iridium flu" is crippling fund raising at
other satellite projects, such as Mr. McCaw's planned
$10 billion Teledesic LLC "Internet in the sky."
Mr. McCaw's investment in ICO "is a rather strange
move," says Andrew Cole, head of the wireless
practice at consulting firm Renaissance Worldwide,
who thinks Mr. McCaw is pouring "money down a rat hole."
But Mr. McCaw has built empires, and fortunes, where others fear to tread.
In the 1980s, he assembled local cellular-phone franchises into a national
network, which he sold to AT&T Corp. in 1994 for $11.5 billion. In 1995, he
took control of Nextel Communications Inc., whose funky cell phones double
as two-way radios. Since then, Nextel's stock has risen more than sixfold,
giving Mr. McCaw a stake valued at more than $6 billion.
'Smart Money'
That record inspires a lot of faith. "Craig McCaw has a history of seeing things
before others do," says Richard Siber, who heads the wireless practice at
Andersen Consulting. "The smart money says he knows something and he
sees something no one else sees."
Just what that is, only Mr. McCaw knows. And he's not talking -- Mr.
McCaw declined to be interviewed. But associates, business partners and
analysts suggest that he has several motives for investing in ICO, from learning
how to operate a satellite network to boosting investor confidence in the
satellite business. Mr. McCaw also won very favorable financial terms,
because of ICO's dire straits.
For the $1.2 billion that he's promised to invest or raise, Mr. McCaw will
take as much as a 75% stake in ICO. That gives him a much better chance of
recouping his investment than ICO's original investors, who expected to raise
$4.7 billion, or the backers of the $5.5 billion Iridium project. Moreover, Mr.
McCaw can invest as little as $370 million and still take operational control of
ICO.
Mr. McCaw believes more than ever in a wireless future, associates say. And,
despite the troubles of ICO and Washington-based Iridium, he still believes
that space will play a vital role. The scope of Mr. McCaw's recent
investments is breathtaking -- all the more so for a man who in 1995 said he
"likes to focus on one or two things at a time."
Besides ICO and Teledesic, he is the largest shareholder in Nextel, which has
offered to pay $6 billion for additional cellular-phone frequencies now held by
bankrupt NextWave Personal Communications Inc. Mr. McCaw's NextLink
Communications Inc. is the largest holder of licenses for local wireless systems
that can connect users to the Internet and is building a national fiber-optic
network.
'Magically Appreciate'
"I think he's building the telecommunications empire of the next century," says
Mark Anderson, editor of Strategic News Service and an industry consultant.
"He continually obtains spectrum and licenses that appear to be of low value
at the time and then they magically appreciate."
These days, the bargains are in the satellite aisle. Iridium had hoped to attract
50,000 new users a month. Instead, the expensive, often unreliable service
had roughly 20,000 users when it filed for protection from creditors Aug. 13.
ICO, unable to raise money for its planned 2001 launch, followed two weeks
later.
That created an opening for Mr. McCaw, whose satellite interests had been
focused on Teledesic and lightning-fast Internet connections. But Teledesic
won't get off the ground before 2004, and Mr. McCaw was itching to get into
the game sooner. "ICO was an opportunity brought to us by financial
markets," says Bob Ratliffe, vice president of Mr. McCaw's Eagle River
Investments LLC.
Mr. McCaw began talks with ICO in late September, and moved quickly. By
Oct. 8, he had submitted a reorganization plan, according to people familiar
with the talks. He examined the ICO satellites in the Los Angeles plant of
Hughes Electronics Corp., where they are being built. On Oct. 30, ICO's
board chose Mr. McCaw's plan over three other proposals, including one
from Indian entrepreneur Subhash Chandra, who continues to seek control of
ICO.
Courts in the U.S., Bermuda and the Cayman Islands approved the first stage
of Mr. McCaw's deal last week, narrowly averting ICO's liquidation. ICO
has headquarters in London and Washington, D.C.
Mr. McCaw doesn't appear to be planning major changes in ICO, which will
offer phone calls and relatively slow data transmissions. Officials say ICO still
plans to launch the first of its 12 satellites early next year. But the design of the
system makes it relatively easy to change some features, such as modestly
increasing the data-transmission speed, from the ground.
ICO says it will avoid Iridium's problems by targeting different markets, such
as ships and remote industrial sites like mines and oil wells, rather than global
business travelers. The company also expects to offer cheaper per-minute
rates and more versatile phones that will work with terrestrial cellular
networks.
Trouble Ahead?
ICO could run into trouble if it turns out that the market for satellite-based
mobile telephone service is big enough for only one company. It will have to
compete with both Iridium and Globalstar, which recently began testing its
service. ICO doesn't expect to begin service until mid-2001.
The ICO investment confounded observers who expected Mr. McCaw to
invest in Iridium because of his longstanding ties to Motorola Corp. Motorola
is the prime contractor and largest investor in Iridium, as well as the prime
contractor for Teledesic.
But Mr. McCaw saw advantages in ICO, such as the data-transmission
ability. He'll also have more opportunity to tinker, because ICO's satellites are
still on the ground. Once they're launched, ICO's satellites are expected to last
10 to 12 years, compared with the five or six years expected remaining on
Iridium.
Still, Mr. McCaw has not ruled out investing in Iridium as well, Mr. Ratliffe
says. That would allow him to begin offering satellite-communications services
today, rather than waiting another 18 months.
And that may offer a clue to the future of Teledesic, about which Mr. McCaw
has been strangely silent in recent months. Associates insist Teledesic remains
on track, but an expected three-month review of the system with Motorola is
approaching five months, with little comment from either side. One person
close to Mr. McCaw suggests that Teledesic may be reborn as a brand for
satellite-communications services, rather than as a specific Internet project.
Analysts believe Mr. McCaw is still committed to Teledesic but may delay the
launch while experimenting with ICO, and potentially Iridium, and hoping to
rebuild investor confidence in satellite projects. |
