Globalstar Places Four Satellites To Salvage S-Band Constellation

Is eight enough? That’s the question facing Globalstar Inc. even as the first four of the handheld satellite phone service provider’s eight planned 2007 satellites were placed into orbit on May 30.

The satellites, launched from Baikonur Cosmodrome aboard a Starsem-operated Soyuz rocket, are intended to augment the company’s failing first-generation constellation. Globalstar plans to place four more replacement satellites into orbit next month aboard another Soyuz rocket.

In February, Globalstar warned customers that its satellite constellation is plagued by degraded performance, and that customers could begin to experience a loss of two-way voice and data service as early as 2008. In December, the company awarded a contract worth approximately $865 million to Thales Alenia Space for the construction of 48 satellites for the second- generation Globalstar constellation, and deliveries are scheduled to begin in summer 2009.

"Today is also a great day for Globalstar stockholders," Jay Monroe, Globalstar’s chairman and CEO, said in a statement after the launch. "Globalstar has invested approximately $120 million into the core satellite business in order to launch these four satellites plus the remaining four ground spares. Globalstar considers these eight satellites to represent the beginning of our next-generation constellation, because they will not only help bridge the gap today but last long into and seamlessly operate with our second-generation constellation."

In a May 28 earnings conference call, the company said that "essentially all" of its 40 satellites have suffered from degraded performance in their S-band antennas. In its Feb. 5 filing to the U.S. Securities and Exchange Commission the company said the rate of degradation has accelerated. The company’s second-generation system will not be in orbit quickly enough to stop any major gap in service.

Globalstar’s immediate concern is to retain customers. While they declined to give specific numbers about lost customers, the company’s April offer of unlimited airtime to "loyal" subscribers was widely interpreted as a last-ditch effort to retain otherwise wayward customers.

The plan may help Globalstar hold subscribers through the next six to 12 months, "but if this plan is maintained for long it will have very negative implications for Globalstar’s future revenues," said analyst Tim Farrar of the research firm TMF Associates. "This announcement makes us extremely nervous about the prospects for the company, both for what the first quarter 2007 results are likely to reveal about voice subscriber losses and in terms of the financing prospects for Globalstar’s next-generation constellation."

Globalstar has not been able to correct the problem and warned it may not be able to. While company executives speak optimistically about "hopeful solutions" and ongoing third-party testing of theoretical remedies, they admitted that it would be between "months, to a [financial] quarter or so" before any progress could be reported.

Globalstar’s voice and data products include mobile and fixed satellite telephones, simplex and duplex satellite data modems and flexible service packages for asset tracking, data monitoring and SCADA applications. Global customer segments include oil and gas, government, mining, forestry, commercial fishing, utilities, military, transportation, heavy construction, emergency preparedness, and business-continuity plus recreational users.

Tony Navarra, Globalstar’s president of global operations, said "the plan of course is to take the satellites and the ones we’ll launch, hopefully by the end of July, to replace the weakest satellites. We picked as first priority the S-band satellites with the weakest service."

Navarra said some customers had encountered a delay in getting a dial tone, along with dropped calls.

"We hope with these satellites we’ll get the level of service back," he said, adding that conclusive results will take six to 12 weeks to ascertain.

Navarra detailed the company’s contingency plans, including reorienting ground station antennas and giving customers who visit the company’s Website two days’ advance, to-the-minute notice of their most favorable or unavailable calling times.

"We are now looking at adding more power to the central beams and reducing the power in the outer beams. This will mean more power to the handset," he said. "The negative aspect is satellite diversity. We’ll have fewer overlapping beams and the subscriber will not get the beam from the horizon as soon as they would have. It might take you a little longer to get a dial tone – we’re talking minutes – but when you get it, the quality of the call will be superior."

Farrar said that the company will have until the end of the year to prove itself before key decisions will have to be made.

"I think the eight satellites will clearly help to improve the service in the short term," he said. "If the rest of them fail next year, then they won’t be of sufficient help to maintain an acceptable voice service. To provide continuous coverage in North America, generally you need about 32 working satellites. Could they provide acceptable service with slightly fewer? Probably, if they arranged the satellites. But could they do it with 16? Probably not."

He said "the key thing will be whether there is some way of maintaining two-way operation beyond next year. If there’s a gap, it’s going to be very hard to retain the customer base."

Conversely, Farrar said, Monroe has made a $200 million commitment to keep Globalstar running. "If he basically agrees to go beyond that level of commitment, I suspect that he could convince other people that it’s worth it for them as well. I think that’s the key sign to investors, that there won’t be a financing problem for the second-generation system."

Should the constellation deteriorate before the replacements are operating, Farrar estimated that the company would need to raise an additional $200 million.

"They are certainly funded through the end of this year," Farrar said. "By the beginning of next year, whether Wachovia will still make the bank loan they have available to them, I don’t know."

Given that time frame, "Jay has until late 2007 to make a decision, whether to make a commitment or to merge – most obviously with Iridium. It’s really dependent on what he chooses to do with his investment. The funding gap could be on the order of $500 million to get the first 24 satellites up. If he was to fill roughly half of that gap, you could see other investors come forward. It would have to be a substantial increase from the $200 million they’ve already committed to."

Farrar noted that Monroe has repeatedly stated his commitment to funding GlobalStar, "but I think there’s a lot of things to impact that decision. It’s a close call one way or another."

The analyst suggested that a merger with Iridium would probably be better for the long-term health of both companies.

They can solidify their customer base and merge the spectrum. Iridium appears to be working OK, but doesn’t have enough spectrum to fund a next-generation system. Globalstar has 27.85 megahertz of spectrum versus Iridium’s 5.15 megahertz" plus 3.1 megahertz the companies have been allotted to share, so "the discrepancy of total spectrum is very substantial."