Globalstar L.P.’s original service providers have until the end of today to decide if they want to take up Loral Space & Communications’ recent offer to buy a portion of their holdings in the satellite partnership.
In a series of complex transactions announced April 24, Loral offered to buy up to 4.2 million of partnership interests in Globalstar from its original service provider partners for $100 per partnership interest, representing 30 percent of each partner’s holdings.
In light of the economic crisis gripping many parts of Asia, it’s likely many will take up the offer. And Loral’s plan should bolster many of the service providers’ commitments to the project. Unlike the Iridium L.L.C. low-earth-orbiting satellite project, Globalstar’s service providers are required to shell out millions for each gateway in their service area.
Some service areas require several gateways, said Timothy Logue, analyst with Couder Brothers in Washington, D.C., which “presents an upfront investment challenge for some of these companies,” he said.
South Korean-based Hyundai Electronics Industries and Dacom Corp.-which were granted exclusive rights to provide service in Taiwan, Thailand, Pakistan, South and North Korea, Hungary, Chile and Finland-have been looking to cash out of the partnership to focus on their core businesses because of economic problems in their country. Vodafone Australia in a Dow Jones report last month said the business case for providing satellite mobile phone service was volume-sensitive and required additional investment. It must construct four gateways.
In all, Alcatel, Daimler-Benz AG, Hyundai, AirTouch Communications Inc., Dacom, France Telecom, Vodafone Group and Elsacom are allowed to take advantage of Loral’s offer. If Loral has not received acceptance notices from partners wanting to sell an aggregate of at least 4.2 million by the end of today, Loral may purchase additional interests from those that wish to sell more of their partnership interests. The plan requires partners selling part of their investments to put half of the cash they receive into an escrow account that will be used to construct gateways and purchase user terminals. Loral filed a registration statement with the Securities and Exchange Commission for a public offering by the company of 16 million shares of its common stock to help fund the plan.
At press time, AirTouch said it was still considering the offer. It is installing five gateways throughout North America. Vodafone and France Telecom were unavailable for comment. Satellite mobile phone service’s success depends on the commitment of the service providers, say analysts. Now that the funding is there, the story is about bringing in customers, said Timothy O’Neil, analyst with SoundView Financial Group in Stamford, Conn.
AirTouch, the service provider in the United States, Canada and Mexico, said it is looking to target cellular and personal communications services carriers in the United States that want to offer satellite service as an extension to their own service. The product could be offered to those customers that need a phone outside a carrier’s coverage area or want to use the phone in Canada and Mexico, said Mike Kerr, president and general manager of AirTouch Satellite Services.
“We’re not looking for exclusive relationships like some of the other partners are. We would love to talk to different cellular and PCS carriers,” said Kerr. “More and more carriers are piecing together applications and thinking about how it will improve their relationship with the customer and bolster revenue opportunity.”
AirTouch also plans to target niche markets such as the marine, transportation and aviation industries; and in Mexico, Kerr points to thousands of villages that don’t have any telephones. “You could drop a Globalstar phone into a village store, and it becomes the community telephone,” he said.
Many of Globalstar’s service providers will target international travelers and underserved markets.
The overall Globalstar system still has significant hurdles, said SoundView’s O’Neil. SoundView, which recently initiated coverage of Globalstar with a short- and long-term hold rating, said the riskiest factor for Globalstar is whether it can properly execute a well-organized marketing and distribution strategy. “An undertaking of this type is unprecedented,” stated SoundView’s report. “The channels must be trained and stocked, the billing infrastructure must be completed and tied together and full authorization must be received from the targeted high-potential regions … The system that offers a distribution network that best complements its strategic positioning and has strategic partners capable of keeping projects on schedule will succeed.”
Globalstar now has eight satellites in orbit after successfully launching four last week. Only 16 gateways will be operational when service begins, which will not be sufficient to provide global coverage, states SoundView. In addition, Globalstar is relying on two spacecraft not normally used for commercial ventures to launch the majority of its satellites.
But Wall Street continues to look favorably upon Globalstar. Globalstar Telecommunications Ltd. (GTL), a general partner of Globalstar L.P., approved a two-for-one stock split of its common shares, the company’s second since its initial public offering in February 1995.
Iridium plans to be the first to offer commercial satellite service on Sept. 23. Its network combines a constellation of 66 LEO satellites. The Globalstar system will be comprised of 48 satellites. Plans call for service to start by mid-1999.
