September 10, 1998

An Investment Opinion
by Alex Schay

Globalstar's Crash Course

The stock of Globalstar Telecommunications Ltd. (Nasdaq: GSTRF) burned up $7 1/8 to $10 3/4 on earth today, in tandem with the company's launch vehicle that flamed out in the upper atmosphere yesterday. The Globalstar partnership announced that a rocket carrying 12 of its satellites didn't last more than five minutes in the air before a malfunction led to the loss of all of the satellites. Globalstar began as a partnership between Loral Corp. and Qualcomm Inc., but after Loral merged with Lockheed Martin in 1996, Loral's interests in Globalstar, together with its other space assets, were combined into Loral Space & Communications (NYSE: LOR). The crash of the Ukrainian Zenit 2 rocket (whose engine failed during take-off), launched from the Baikonur space center in Kazakhstan, will result in a delay of the partnership's commerical satellite communications service roll-out until the end of 1999 -- or possibly even later.

As it is presently designed, the Globalstar satellite system hopes to offer 800 million to 1 billion minutes per month of telecommunications connection capacity and will ostensibly be available just about anywhere on earth (excluding use by polar bears and some mariners in the middle of the ocean). The system is a low earth orbit constellation (LEO) consisting of 48 satellites along with eight orbiting "spares," which can be used as replacements for any of the primary 48 if one or more should fail. Too bad the partnership only has eight satellites floating around in the ether now, which should indicate to readers that the launch of these twelve satellites (representing 25% of the core grouping) was actually a crucial portion of Globalstar's initial infrastructure build. Many analysts are saying, "I told you so" today after voicing concern about the partnership's strategy of putting too many costly eggs into one potentially unstable basket -- even though the Zenit fail rate up until yesterday was only 10%.

Planned Calendar of Scheduled Launches

Launch   Launch   Launch      Number of         Launch 
 Date     Vehicle  Provider    Satellites         Site 
 2/14/98  Delta    Boeing           4     Cape Canaveral, FL 
 4/24/98  Delta    Boeing           4     Cape Canaveral, FL 
 3Q98     Zenit    NPO Yuzhnoya    12     Baikonur, Kazakhstan 
 4Q98     Zenit    NPO Yuzhnoya    12     Baikonur, Kazakhstan 
 4Q98     Zenit    NPO Yuzhnoya    12     Baikonur, Kazakhstan 
 1Q99     Soyuz    Starsem          4     Baikonur, Kazakhstan 
 1Q99     Soyuz    Starsem          4     Baikonur, Kazakhstan 
 2Q99     Soyuz    Starsem          4     Baikonur, Kazakhstan 
 (Company Data)
The partnership's initial assessment of the situation is that it could "resume its launch campaign aboard the Soyuz as early as November" and that it only needs 32 satellites to operate an effective service -- Globalstar has another 14 satellites ready to go in Kazakhstan with an additional 16 undergoing tests. The November Soyuz rocket can carry 4 satellites, and Globalstar estimates that it can get 36 birds up and flying by May of 1999. Among the "recovery alternatives" Globalstar has in place is a stepped-up pace of launches that were initially contracted for Soyuz and Delta 2 rockets, as well as the launch of additional satellites on the Zenit 2 -- assuming a launch failure investigation doesn't reveal any structural issues that jeopardize the relationship. Analysts aren't waiting around though -- and some mandatory downgrades to "hold" occurred today due to the lack of launch visibility and other questions related to the revenue push-out in 1999.

Globalstar estimates that yesterday's blow-up will cost it $85 million associated with amending its launch schedule and will cut into 1999 estimated revenues by about $300 million. With the $15 million dollar satellites fully insured (that estimate puts the total loss at $180 million without the launch costs, which will also probably mean industrywide insurance rates will go up), the insurance investigation will probably take some time and Globalstar will need a cash infusion -- probably from pseudo-parent Loral Space & Communications, which also has a pseudo obligation to Globalstar by virtue of owning 42% (Loral CEO Bernard Schwartz is also CEO of Globalstar). Loral dropped $5 1/16 to $13 today.

Overall, funding has gone well for the venture. The Globalstar system's total cost thus far has been estimated to be around $2.8 billion, and in mid-May the partnership locked in the "final" $275 million through a private placement of 11.5% senior notes due June 1, 2005. Incidentally, Globalstar's 11 3/8% bonds due in 2004 fell about 15 points ($150 per $1000 face value) to $650 today. Contained within that $2.8 billion total are design costs, construction and deployment of the Globalstar System, working capital needs, cash interest on borrowings, and operating expenses. The system, once up and running, will be composed of four segments: Space Segment, Ground Segment, Communications Technology, and Handsets.

OK, so what about the future and the company's current valuation? While it's easy to knock the discounted cash flow analysis, those that do miss the investing point entirely. It's a necessary step in attempting to get a handle on the expectations that are currently built into a stock. While the following is an "uneducated" guess in terms of the EBITDA potential and the discount rate for Globalstar, it still has some value as a basis for monitoring expectations -- either higher or lower.

Globalstar LP Discounted Cash Flow

*figures in thousands 1998 (end)

Terminal Value @ 8x Consolidated EBITDA
Year 2005 $20,500,000,000

Discount rate 25%

Sum of Free Cash Flow at PV $2,000,000
Add: Terminal Value $4,299,161
Total Value $6,299,161

Less: Debt, Plus: Cash, Plus: Option Proceeds, Plus: Warrant Proceeds, Plus: Conversion Of Preferreds =
Net Asset Value $5,711,883

Fully Diluted Shares Outstanding 82,007

Private Market Value Per Share $69

Target Discount to Net Asset Value 40%
Target Price Per Share $41.40

Closing Price Today $10 3/4

Play with some earnings scenarios for yourself and you'll probably see that an investor with a 5-year time horizon might take today's drop as an attractive opportunity. After all, satellite telecommunications is the final frontier, and Globalstar is one of the major operators in this "space." Competing systems are not just going to appear overnight.

Technological advances in battery power and digital compression techniques coupled with lower manufacturing costs of the satellites themselves have all contributed to the changing economics of the satellite industry. With satellite projects like Iridium and Globalstar slated for full-scale implementation before the end of the millennium, a host of issues related to the coming rollout are now working themselves out (like Iridium's delayed launch and Globalstar's crash course). Satellite systems are burdened by horrendous start-up costs; however, the promise of low operating expenses and significant cash flow once the systems are in place act as financial balm to both investors and financiers.