DJ FOCUS ON FILINGS: Will Iridium Losses Sink Motorola?
May 25, 1999
Dow Jones Newswires
By TODD GOREN
Dow Jones Newswires
A Dow Jones Newswires Column
WASHINGTON (Dow Jones) -- Ever wonder if the market turns a blind eye to
certain events?
Take, for example, the links between Iridium World Communications Ltd.
(IRID) and Motorola Inc. (MOT).
Most people who follow the telecom industry know Iridium is having problems.
The company had hoped to have at least 100,000 users of its satellite phones in
place by now, instead of the 10,000 or so actually in use. It believes it needs
500,000 subscribers to turn a profit.
As reported, Iridium on March 31 asked for a 60-day extension to meet certain
loan covenants because it didn't have anywhere near the number of subscribers
required under the loans.
The interesting news came out of Motorola's quarterly report where, as first
reported by Federal Filings Business News on May 19, the company warned
that Iridium may ultimately have to declare bankruptcy.
If the bankruptcy comes to pass, Motorola, one of the major financial backers of
Iridium and 18% owner of the company, would be on the hook for a significant
chunk of change, more than $1 billion to be exact.
If Iridium defaults on its $800 million senior secured credit agreement, Motorola
would have to pay $50 million. In addition, Motorola has directly guaranteed the
remaining $750 million under the credit facility, of which $480 million is
outstanding. Furthermore, the company has permitted Iridium to defer
contractual payments of $265 million and expects to defer an additional $135
million. In the event of an Iridium bankruptcy, Motorola does not expect to
receive full payment of the amounts deferred.
So far that's $930 million that Motorola would either owe to lenders or would
not be able to collect from Iridium. Motorola is due to receive $3.2 billion under
its contracts with Iridium and so far has received $259 million. In addition, if
Iridium declares bankruptcy, Motorola faces the write-down of assets, the loss
of its $263 million of equity investment and its share of any final Iridium losses.
Motorola's share of Iridium's losses - $50 million for first quarter 1999 alone - is
nothing to sneeze at.
Suppose Motorola takes the hit to earnings of almost $1 billion. That means that
the company is wiping out almost two years of earnings - it earned $171 million
in the first quarter.
Iridium May Be Just One Of Motorola's Problems
Yet despite all these potential problems, Motorola's stock recently traded at 83
15/16, just 5.6% below the 52-week high of 88 7/8 set two weeks ago and
more than double the year low of 38 3/8 set in October. Analysts are calling for a
five-year earnings per share growth rate of 17.3%, and the stock trades at 42
times 1999 EPS estimates of $2 and 28.7 times 2000 EPS estimates of $2.92.
To be sure, other factors have affected Motorola's stock price. The stock market
in general has exploded since the October trough, and the company announced it
was selling its chip-manufacturing division, which typically posted lower margins
than the other divisions. In addition, there has been a general feeling that
Motorola's worst days are over.
Interestingly, the Iridium problem may only be a sign of other difficulties within
Motorola.
Part of Motorola's future growth was due to come from another satellite project,
Teledisc, which was to create satellite based Internet connections that could
transmit data at up to 2,000 times the speed of dial-up modems. Industry reports
claim, however, that Motorola is showing signs of backing out of the project,
mainly due to the problems at Iridium.
If so, that would leave Motorola's future growth in the hands of communications
equipment. For the first quarter, Motorola's personal communications division
posted sales of $2.6 billion, 36% of total sales for the period. Excluding the
soon-to-be-sold chip division's sales, the personal communications sector
generated 48.9% of Motorola's first quarter sales.
Admittedly, the communications equipment area over the past few years has seen
tremendous growth that is expected to continue as cellular phones extend their
reach into less developed parts of the world. However, the division produced
only $83 million in operating profits for the quarter - 34% of Motorola's total
profits for the quarter, or 42.1% excluding the chip division - with an operating
margin of only 3.2%, not the kind of numbers most people want to be paying 42
times earnings for.
In addition, the market for communications equipment continues to intensify.
Who hasn't seen the ads where people who sign up for some cellular phone
service can get a digital cellular phone for $50 - free after a $50 rebate? The
same type of competition exists in other parts of the telecommunications
equipment sector.
Yet analysts still have a buy rating on the stock. I freely admit that it's highly
possible they're seeing something I'm not. But in my opinion, the strong likelihood
of at least several hundred million in charges from Iridium combined with intense
competition in Motorola's largest areas should be enough to give any investor
pause before picking up shares of Motorola stock.
- Todd Goren; Federal Filings Business News; 202-628-9782;
todd.goren@fedfil.com
It should be noted that Motorola has reserves of about $850 million that could
substantially reduce any effect of an Iridium bankruptcy.
Although the reserve may mitigate the charge, there are a significant number of
people who believe that large chunks of Motorola's future growth is going to
come from its satellite-communications division. And with Iridium in trouble and
Motorola appearing to balk at its Teledisc commitment, that expected growth is
going to have to come from somewhere else.
For now, the combination of a loss of several quarters' worth of earnings plus lost
business at Motorola's satellite-manufacturing facility are worth paying attention
to.
-Todd Goren; Federal Filings Business News; 202-628-9782;
todd.goren@fedfil.com
Briefing Book for: IRID | MOT
Return to top of page | Format for printing
Copyright © 1999 Dow Jones & Company, Inc. All Rights Reserved.
|
