by Marc Crossman
About a year ago, Iridium was set to make its debut as the world’s first provider of mobile satellite telecommunications services. The mobile satellite services (MSS) sector was all abuzz as Iridium was about to kick off a new age in telecommunications. However, due to software delays, the commercial launch of Iridium was postponed, and as a result, market conditions for MSS stocks took a downturn. Both Iridium [IRID] and Globalstar [GSTRF] were down approximately 30 percent versus their highs from the previous month, and the IPO of ICO, the third mobile satellite player, struggled to be completed.
In November 1998, Iridium finally launched commercial service, giving the sector the lift that it needed. However, this boost was short-lived, as it soon became evident that Iridium did not have any distribution (there were no handsets in the pipeline), hence subscriber growth was almost non-existent. Iridium’s failure had a domino effect on the MSS sector. In the first three months of this year, MSS stocks were on a downslide, and satellite start-ups were having great difficulty obtaining financing.
Taking stock of the situation, Globalstar set about differentiating and distancing itself from Iridium. Globalstar’s stock price in the last few months indicates that the company has achieved its distinctiveness from Iridium. Globalstar has accomplished this through forging strong relationships with its service provider partners and focusing the market on these relationships.
At present, Iridium (which has officially defaulted on two of its syndicate loans) is preparing to resolve its debt problems through an in-court restructuring agreement with its lenders and bondholders. At the same time, Globalstar is preparing to launch commercial service on its network, and ICO, the third MSS player in line, is struggling to complete its financing requirements and has followed Iridium’s cue by filing for Chapter 11 bankruptcy protection.
Predicting the success of Globalstar is difficult; however, Globalstar has greatly benefited from Iridium’s mistakes. So far, Globalstar is already ahead of Iridium, in that Globalstar has distribution in place, i.e. handsets in the pipeline. In addition, it is backed by a major strategic shareholder, Loral Space and Communications, that is still committed to and reliant upon its success. With hindsight in tow, Globalstar is doing all of the right things that should make it a commercial success. The unknown factor, however, is market demand, and this will be the key determinant.
Speaking of reliance, there is another party that is unquestionably engrossed in the evolution of Globalstar, that is, ICO Global. A successful commercial launch for Globalstar will remove the financing brick wall that ICO has hit. So far, ICO has raised approximately half of its capital requirements. Unfortunately, being the third player in the game, it has often been at the mercy of its predecessors. After having failed to complete its rights offering plan, blamed for the most part on Iridium’s unraveling, the company has turned to its many very powerful strategic partners for a rescue plan.
So far, ICO’s cry for help has been unheeded. Under the most recent proposal, ICO would cede control of the company to the strategic partners for $600 million plus options, and the current equity holders would be diluted down from 100 percent ownership to 63 percent, if no options are exercised, and 46 percent if all options are exercised. Given the current financing environment and the fact that ICO has been forced to file for bankruptcy, it is safe to assume that any deal ICO completes in the near-term will leave the current investors with a much smaller percentage ownership in the company. However, since ICO is in bankruptcy, any deal which raises additional funds while still placing value on the current equity would be a good deal for ICO shareholders. However, ICO’s chances of raising funds in the near-term are bleak. ICO still needs to raise an additional $630 million to $1 billion just to finish building its system (assuming the current proposal closes). Only a successful launch for Globastar will alleviate concerns for ICO.
Thus, this fall it will be Globalstar’s turn to take the satellite communications market to the next level. Although the excitement level is not as palpable as it was a year ago, the feeling of anxiety is on par. The future of the MSS sector now rests with Globalstar. GSTRF has been on a nice run since the beginning of the second quarter as a result of successful launches and completion of financing requirements. It will continue to tiptoe upwards until its commercial launch date; however, the acid test for Globalstar will be subscribers on the network after commercial launch.
Marc Crossman is a vice president at J.P. Morgan in New York City. These views are those of the author and do not necessarily reflect the views of the Via Satellite editors or J.P. Morgan.
