In recent days, rumours have been circulating that troubled mobile satellite provider Globalstar is in talks with Inmarsat for a possible bailout. Fuelling this rumour is the fact that Globalstar Chairman and CEO Olof Lundberg used to be the director general of Inmarsat.

Globalstar filed for Chapter 11 protection in mid-February and has since been in the process of restructuring its business. Last year, the company reported a mere $6.4 million in revenues from approximately 66,000 subscribers. It had $46 million in cash at the end of March.

Executing a turnaround of Globalstar is a daunting task and would need a significant injection of fresh capital. Any purchaser interested in providing a global service would firstly have to plug gaps in coverage. Globalstar cannot provide service in most of Africa, the Indian subcontinent, and most of South Asia. In addition, it cannot provide coverage over the major oceans (except for the North Atlantic corridor and northeast Pacific). It is therefore at a disadvantage to competitors such as Iridium and Inmarsat. Furthermore, roaming is not possible in some countries because certain service providers have not been able to reach business arrangements with one another and conduct roaming testing. However, Globalstar claims that all non-roaming situations will be eliminated entirely by the end of the year.

According to Dr. Amad Ghais, chairman of the Mobile Satellites Users Association, “the problem is that Globalstar’s operating costs are high. Even if Inmarsat bought Globalstar for $1 they would have to be sure that they can generate enough revenue to cover expenses. The Globalstar system relies on a simple bent-pipe satellite design which means that its geographical coverage is proportional to the number of gateways in operation.” However, gateways contribute significantly to operational costs, around $1 million to $1.5 million per gateway annually, according to some estimates. Globalstar may be forced to acquire gateways from partners that want to exit the business if it wants to continue its presence in certain geographical markets. This would add substantial costs to its business, as most of these gateway businesses are running at a loss.

According to U.S. regulatory filings, Globalstar has already acquired a majority interest in Globalstar Canada by purchasing all the outstanding common shares of Vodafone Satellite Services Inc. (VSSI) for $100 plus acquisition costs of $258,000. VSSI indirectly owns the majority interest in Globalstar Canada. Globalstar has announced that it will acquire the United States and Caribbean service provider and gateway operations from Vodafone upon receipt of the required regulatory approvals.

Globalstar is also expected to acquire the gateway of France Telecom/Alcatel joint venture TE.SA.M in France. However, TE.SA.M has reached an agreement to sell its service provider and gateway businesses in Turkey, Venezuela, Argentina and Peru to local companies. Meanwhile, Elsacom has closed down its gateway in Finland, though it continues to provide coverage for that area through its Italian gateway.

“If we were forced to acquire all our partners’ gateways, that would certainly strain our resources,” said Mac Jeffery, director of public relations at Globalstar. “However, that is definitely not the case. Some of our partners such as Vodafone in North America and TE.SA.M have indicated to us that they want to exit the business, but most of our other gateways will probably continue under their current owners or new ones, not under Globalstar. Our top-tier gateways are Canada, Russia, United States, Brazil, Australia and Saudi Arabia and some of these, such as Canada and Russia, are in the black.”

From Globalstar’s perspective, being bought by Inmarsat would bring obvious benefits. Inmarsat is a long-standing operator with an established distribution network and a strong reputation for service reliability. During the past 12 months, many potential customers have been wary of signing up with Globalstar because they feared the company may not be around in another 12 months’ time. Despite this, Jeffery says Globalstar’s subscriber base has grown and net activations have always exceeded deactivations. A purchase by Inmarsat would alleviate concerns about Globalstar’s long-term prospects and spur subscriber growth.

Inmarsat does not have a “walk and talk” product, but instead offers a laptop-sized terminal called Mini-M, which service providers describe as a “steady, niche market.” As Inmarsat service providers consolidate and become multiple service providers, it may make sense for Inmarsat to be able to bundle a hand-held service such as Globalstar with their other offerings. Stratos and France Telecom already offer Iridium and Globalstar and it is only a question of time before other big service providers such as Telenor and Xantic follow suit.

However, at a time when sales of its M4 data terminal have failed to meet expectations, Inmarsat may fear that a Globalstar product might cannibalise its Mini-M revenue stream. The Mini-M product is a significant revenue generator contributing in excess of $70 million to the company’s $400 million turnover. Inmarsat’s declared strategy is to develop its data offerings not voice service. Buying Globalstar would divert management attention from other projects and the company would have to face the decision of replacing the Globalstar satellites in the 2008 timeframe, if not sooner. Globalstar has already lost two satellites (which were replaced with spares) and recently experienced a worrisome spate of anomalies that affected another five satellites.

Roger Rusch, president of the TelAstra, doubts that Inmarsat would find Globalstar an attractive acquisition at any price. “Sure, they may be talking to Globalstar, but the only reason I can imagine that Inmarsat might be interested in Globalstar would be to get access to its customer base with the intention of eventually migrating those customers over to Inmarsat. I doubt very much that Inmarsat would be willing to invest in a second generation Globalstar. Inmarsat’s strategy all along has been to provide an unique service at a high price to a specialised market. The size of the market is limited because there are only so many companies that need these type of services and are willing to pay a high price for them.”

–Gareth Owen