ot--Motorola seen facing tough choices on Iridium
CHICAGO, May 21 (Reuters) - Wireless communications and semiconductor maker
Motorola Inc. (NYSE:MOT - news) faces a lose-lose situation as it decides whether to
inject more money into financially troubled Iridium LLC (Nasdaq:IRID - news), the global
satellite phone system it bankrolled, telecommunications analysts said.
Iridium operates a satellite system that allows customers to make calls from virtually
anywhere on earth. The stock became a favorite on Wall Street. Just six months ago, its
shares were trading near $50.
However, analysts soured on Iridium as the company fell short of subscriber and revenue growth targets. Earlier this month,
Iridium hired an investment bank to advise it on debt restructuring. The stock now trades around $10 a share, and two of
Iridium's top executives have recently resigned.
Schaumburg, Ill.-based Motorola owns about 18 percent of Iridium and has guaranteed a large portion of the company's debt.
Some analysts have questioned whether Motorola reserved enough money to cover its costs should Iridium default.
''We believe Motorola is on the hook for between $1.5 billion and $2.0 billion,'' said analyst Mark Roberts, who follows
Motorola for Everen Securities. ''Our estimate is that way less than half of that has been reserved.''
Motorola spokesman Scott Wyman declined to comment on specific plans for Iridium but said the company had not made any
additional financial commitments beyond those that currently exist.
In a filing this week with the U.S. Securities and Exchange Commission, Motorola detailed its financial commitments to Iridium,
which total $1.66 billion. Of that, Iridium has drawn $882 million, Wyman said. In the filing, Motorola said if Iridium defaulted,
it would have a ''material negative impact'' on Motorola's financial results.
Calls to Iridium were not immediately returned.
''They have two options: They can either let it go under, or they can throw good money after bad in an effort to try to create a
customer for themselves,'' Roberts said. ''I would be more positive on Motorola if they would let it go under.''
Both options hold pitfalls for Motorola, analysts said. If Iridium failed, Motorola would stand to lose a substantial amount of
money. At the same time, Wall Street is leery of sinking any more money into Iridium, which said in its year-end SEC filing that
it would need $1.65 billion to fund operations this year.
One answer may be to enlist the support of the other firms in the 19-member consortium that forms Iridium, said Chris Chaney,
an analyst with A.G. Edwards. That group includes Lockheed Martin Corp. (NYSE:LMT - news) and Raytheon Co.
(NYSE:RTNa - news).
''I think they're going to be seriously encouraging other members of the consortium to kick in more money,'' Chaney said.
Several analysts said Iridium misjudged its key market, which was originally supposed to be globetrotting employees of major
multinational corporations. Iridium said earlier this month it no longer expected to meet its target of 27,000 satellite subscribers
by May 31. At the end of March, Iridium had just 10,294 customers.
''What it looks like now is a multi-billion-dollar science project,'' Chaney said. ''There are fundamental problems: the handsets
are big, the service is expensive, and the customers haven't really been identified.''
Iridium has had trouble with production and distribution, a problem it cites as part of the reason why its customer base is lower
than it had expected. Critics complain that the Iridium handset, which retails for about $3,200, is bulky and requires a fat,
foot-long antenna. The handsets also require line-of-sight contact with the satellites -- which means they can't be used inside or
in a car without a second antenna.
''Right now they (Iridium) are in a Catch 22,'' said Timothy O'Neil, wireless communications analyst with SoundView
Technology Group. ''They don't have the funding to continue operations, and therefore potential customers are concerned that
a service provider that they sign up with may not be there in the long term. The people on the financial side are saying, 'Why
should we invest more when you have no customers?'''
O'Neil cut his rating on Iridium to hold from buy last week, and set a price target of $7 a share -- below Friday's price of
$10.06 and well off the 52-week high of $62.38.
O'Neil said Iridium needs to focus on niche markets such as the U.S. government, maritime firms, natural resource extraction
companies such as oil and gas drillers, and the telecommunications infrastructure industry.
Motorola's Wyman said the company had hired sales staff to sell Iridium phones to those markets.
''I think at this point it's too early (for Motorola) to cut them off because in one key market that they can address -- that is the
U.S. government -- they've had some success,'' O'Neil said. ''It's too soon to throw in the towel,'' he said.
Shares of Motorola were up $1.56 cents at $84.69 in afternoon New York Stock Exchange trading. Iridium was up 47 cents
to $10.25 per share on Nasdaq.
More Quotes
and News:
Iridium World Communications Ltd (Nasdaq:IRID - news)
Lockheed Martin Corp (NYSE:LMT - news)
Motorola Inc (NYSE:MOT - news)
Raytheon Co (NYSE:RTNa - news)
Related News Categories: aerospace/defense, computers, options, telecom, US Market News
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