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I liked that Globalstar's phones worked. I liked that it had partnered with traditional telecom companies like Qualcomm (QCOM) and China Unicom (CHU) to sell the service. I liked the fact that its rates would be at least half of Iridium's exorbitant fees that were as high as $6 a minute. I thought that Globalstar would be a success. I was wrong. By all accounts, Globalstar, which launched its service earlier this year, has been very slow in selling phones. Just how many customers it has signed up is, unfortunately, based on rumor and supposition because the company refuses to divulge the actual number. Its goal was to reach 550,000 customers by yearend. Is that remotely imaginable at this point? The only hint given by CEO Bernard Schwartz: "It will be pretty hard to hit that figure." BACKUP BIRDS. Despite all of the positives that Globalstar had going for it in comparison to Iridium, whose bulky phones cost too much and provided poor reception, this venture may also be on the verge of failure. It lost $92 million on no revenues in the first quarter. Its share price has plummeted to just $8, off 85% since January, when it was selling for $53.75. Under the rosiest of scenarios, Globalstar faces a huge crunch over the next eight months. Although the 52 satellites that make up its network are already in the sky, it still needs to build eight more birds (and their launch vehicles) to be held on the ground as backups. That task will be finished by yearend, but it will take up almost all of the company's $500 million in cash and available credit. CEO Schwartz has said the company needs $160 million extra, which he expects to get from operations as the system is rolled out. If the company doesn't make that much money in the second half of the year, it will have to borrow more. A self-assured Schwartz told shareholders in May: "We are highly confident that sufficient resources are available to resolve this issue." Of course, there's always the possibility of borrowing money from parent Loral, which owns 42% of Globalstar and of which Schwartz is also CEO. But Loral has more than $1.9 billion worth of debt on its books, and it, too, might have trouble finding financing if it continues to leverage itself too much to Globalstar. POOR VISION. That dire financing situation is why Wall Street is so down on Globalstar. Out of 10 analysts following the stock, none rate it a buy, according to Zacks Investment Research. Institutional shareholders have been dumping the stock. And reports from C.E. Unterberg Towbin, Prudential Securities, and Merrill Lynch all question the future viability of Globalstar's business plan. That's something that many people, including myself, should have done more scrupulously in the past. Like the dreamy Loral executives who came up with the idea for Globalstar, I overlooked one key fact: The terrestial-based global cell-phone system would advance more rapidly than anyone expected. In order to launch a constellation of satellites, you need about a 10 years to plan, build, and troubleshoot. If you're going to commit billions of dollars to such a plan, you had better have a good vision of what the world will look like in a decade. The creators of Globalstar and Iridium got it right that everyone the world over would be willing to pay billions of dollars for go-anywhere phones and data links. What they got wrong was that the cell phone would evolve rapidly enough to provide what people wanted. Remember how bad cell phones were 10 years ago? They had poor reception, worked only in some major metropolitan areas, and were affordable only to top execs and world leaders. Today, they rival land lines in quality and are seen more often attached to the ears of gabbing teenagers than in the hands of movers and shakers. BIG ENOUGH BASE? Of course, a number of niche markets still need satellite phones. Offshore oil rigs, private transoceanic airplanes, and intelligence agencies are all willing to pay highly for satellite phones. Globalstar released an announcement on June 16 boasting that the South Korean delegation to the Korean summit used Globalstar phones to call home from North Korea, since telephone service is so shoddy in that communist state. It's doubtful that the North Korean populace will become wealthy enough to afford satellite phones anytime soon. It's also highly questionable that Globalstar's other target customers will be a large enough base to build a thriving company on. The number of paying customers isn't the only info Globalstar has been extremely quiet about. Take the way it's handling its last source of financing -- a $250 million line of credit from Chase Bank. The account was supposed to expire on June 30, and all indications from the company were that it would not be tapping into the account to fund operations. "We have enough money to run through September, and then we will have alternate forms of financing available," said CEO Schwarz in a statement released to the press. But on Wednesday, June 28, William Kidd, the highly regarded analyst covering the company for C.E. Unterberg Towbin, released a report in which he claimed to have learned that the company has drained that bank account. "We believe that Globalstar drew on the facility on June 10," Kidd wrote. "TOO RISKY"? If true, that leaves Globalstar's main partners, Lockheed Martin (LMT) and Qualcomm in a very difficult position. Lockheed had guaranteed $150 million of the account and Qualcomm almost $30 million. That means Chase would probably try to collect what it can from those two companies if Globalstar ever went under. The leading rumor on Wall Street is that Globalstar emptied that bank account precisely because it does plan to enter bankruptcy very soon. "I think they want to have a lot of cash stored up in order to last for a few more months in bankruptcy protection in hopes that some angel will fall from the sky and rescue them," says a hedge-fund manager who has shorted Globalstar's stock in the past and who requested to remain unidentified. Kidd disagrees. "We strongly doubt that Globalstar has entered a strategy that would trigger a bankruptcy," he says. "That theory is just too risky." He points out that a bankruptcy judge might force the company to give the money back to Chase or give it out to other creditors. Schwartz, who spent decades building Loral into a defense giant before moving it into telecom, has come through many tough scrapes before. He hopes the Street will turn positive on the Globalstar by this fall. "Globalstar has been consistently open and candid with the investment community regarding its funding requirements," he said in a June 19 statement. Many on the Street wouldn't agree. Thanks to management's sealed lips on its progress lately, anecdotes of poor sales, and the iffyness of future financing, this bird appears badly wounded. Jaffe writes about the markets for Business Week Online What do you think about Globalstar? Join in the discussion at our Ask Sam Jaffe Forum EDITED BY THANE PETERSON |
