FOOL ON THE HILL
Globalstar's satellite communications system may work well, but the company secured few subscribers and changed its focus to data services too late for current shareholders. Whether through a Qualcomm-led rescue or not, the company will have to reorganize through Chapter 11 bankruptcy and leave shareholders with nothing. Just another reminder that the flush capital markets of the late 1990s were an anomaly, and thus investors in developing unprofitable companies should know that if you build it, they may not come soon enough.
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With unconfirmed reports that Qualcomm (Nasdaq: QCOM) may lead a group of investors to bail out the falling Globalstar (Nasdaq: GSTRF), the satellite wireless communications venture is all but dead for current shareholders. The proposed deal reportedly provides $500 million in new cash only if Globalstar files for Chapter 11 bankruptcy to wipe out its debt. That means shareholders will take nothing: We are the weakest links! With last week's announcement that Olof Lundberg would replace Bernard Schwartz as CEO, the forces appear aligned for the final act with new management poised to lead the company through a reorganization. Whether it comes now or later, Chapter 11 bankruptcy appears certain. Globalstar is on the hook for $1.4 billion in debt, and the company took in $1.9 million last quarter. This would be delightful, were it not for the positioning of the "b" in billion, and "m" in million. No wonder Globalstar shares closed Friday at $0.59. I bought them late last summer for $9.43 per share. Why did I do this? Globalstar was supposed to be the "Not Iridium," the antidote to the $5 billion dollar system based on TDMA technology whose assets sold for $25 million in bankruptcy. No, Globalstar used CDMA technology -- CDMA! CDMA! the faithful shouted -- in its network of low-Earth orbit satellites destined to provide wireless digital communications to the majority of the world that lacks basic telephone service. The Federal Communications Commission (FCC) granted the necessary licenses in 1995, and the company began to deploy the satellites and communications gateways. Did anyone really know what the subscriber uptake would be? No. This was the Field of Dreams school of investing: Build it and they will come -- boaters, businessmen, and Bedouins. But when the Globalstar system commenced service in Q1 2000, they did not come. They stayed away in droves. As of this Jan. 7, despite coverage of 75% of the world, the company had 31,000 subscribers. That rose to 40,700 through the end of March. In the end, it was simple math. It cost too much cash to deploy the system, subscriber growth hasn't been fast enough to provide cash to carry the debt, and no angel's willing to flush any more cash through the system. At some point, lenders determine the risk is too great to lend more, and management can't find buyers for any more worthless stock, already diluted to Weimar Republic inflation standards. The company's defaults grow more frequent, and the funeral march begins. Globalstar's first default was last June, when financing appeared, followed by another in January, when it did not. By suspending payments on all debt -- 8% and 9% convertible preferred, a $500 million credit facility, Qualcomm's vendor financing facility, and 11.38% senior notes due 2004 -- the company believes its $138 million in cash at the end of March can carry it through the end of the year at its current cash burn rate. Meanwhile, unhappy creditors have waited for a report from The Blackstone Group, an independent consultancy, on Globalstar's reorganization and refinancing options. Why did I jump? I ran through all the arguments, falling for the unmet need pitch while ignoring the $1,000-plus cost of the phone and dollar-per-minute usage cost. Though technology commentator George Gilder's belief in the system's technological superiority meant something, it didn't carry much weight because, to me, he has no credibility as a business analyst. On the other hand, the marquee list of Globalstar investors -- Qualcomm, Vodafone (NYSE: VOD), France Telecom (NYSE: FTE) and Alcatel (NYSE: ALA) -- suggested strong and committed backing. And couldn't a possible deal to provide data services to airplane passengers more than use Globalstar's capacity and bring wealth to all? Globalstar would price its service more rationally than did Iridium, it would be a perfect solution for mobile wireless in cars, and there was no competition on the horizon. Absolutely none of that matters when $1.4 billion in debt faces $1.9 million in revenue, a gap so wide it would daunt Evel Kneivel. Too late for current shareholders, the company shifted its marketing emphasis from voice to data services, where its prospects for success haven't been enough for capital markets that have had enough of "prospects." Lesson The last act In that event, a federal bankruptcy court judge oversees efforts by the company and creditors to agree on a reorganization plan through which the company continues operating and, one hopes, generates cash to pay creditors. After confirmation of the plan, Globalstar receives a discharge from its debts. Qualcomm and friends may catch the falling Globalstar, but a lighter one, shorn of debt -- and current shareholders. The company will likely continue to operate and may make money for future investors, but not for us, who will lose everything in any Globalstar bankruptcy. Like a deer in the headlights, I have not yet sold. Tom Jacobs (TMF Tom9) is sure that the wireless boom is just around the corner ... or the next one ... oh well. At press time, he owned shares of Qualcomm, Globalstar, and Metricom. To see his stock holdings (and giggle), view his profile, and check out The Motley Fool's disclosure policy.
There seemed so many arguments to take on the risk-reward ratio. A few points -- summarized on Fool discussion boards -- persuaded me to believe this was a risk-reward ratio worth accepting. I intentionally take on large amounts of risk, but try to limit each company to 5% of my portfolio. Wireless communication seemed a no-brainer opportunity for gangbusters growth, and because I preferred evaluating financial statements to picking winning technologies, I spread part of my portfolio over a set of companies to cover the bases. Two of them were Globalstar and Metricom (Nasdaq: MCOM).
Investors in any unprofitable developing company must know exactly how much cash it has and when it will run out at current burn rates, completely disregarding the company's -- and any other investors' -- rosy scenarios for profits, profits, profits! For companies dependent on lots of new subscribers to a service, add a year or five to the projections to subscriber numbers and cash flow. Capital markets will only rarely fund groovy new technologies as they build Fields of Dreams: I'll bet that as the years pass, the late 1990s "Throw-Money-At-It Era" will appear a briefer and briefer anomaly, until it disappears in a blink.
And now, for Globalstar? Speculating about the deal, I imagine Qualcomm is happy with Blackstone's scenarios for company survival but wants no part of Globalstar's current debt. Qualcomm has already written off its investment in Globalstar, but sees the satellite CDMA-based system as an integral feature of its plans for world CDMA domination. The CDMA gorilla and its friends will likely promise post-Chapter 11 financing -- or even financing to the company while in reorganization -- if Globalstar commits to filing Chapter 11 bankruptcy reorganization.
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