News that Globalstar L.L.P. lost 12 satellites late last week in a failed rocket launch left mobile satellite service investors uneasy. An announcement from Iridium L.L.C. indicating it plans to postpone commercial service because of technical delays didn’t help investors’ confidence either.
The glitches are a reminder of the high stakes involved with the MSS industry, which aims to offer mobile telephone service to areas underserved by existing telecommunications systems. Analysts say launch problems and software bugs are common in these large-scope projects and investors shouldn’t be surprised at the failures. But investors may become more careful with their money.
“My belief is at first blush [Globalstar’s failure] is bad for (MSS) companies trying to raise money in the financial community,” said Tim O’Neil, financial analyst with SoundView Financial Group in Stamford, Conn. “It’s bad because once investors start to realize that all programs aren’t the same, they will scrutinize relationships and strategy a little more closely … What we’re seeing is a realization that some companies are riskier than others, and some projects are riskier than others.”
Globalstar “is under a microscope now,” said Bob Egan, research director with the Gartner Group in Stamford, Conn. “This certainly raises the risk of the company’s ability to attract investors … The question now is: How they mitigate that risk and get back on track?”
After the launch accident, Moody’s Investor Services Inc. downgraded Globalstar debt. However, Moody’s said Globalstar had $190 million in insurance, which could cover the disaster. Globalstar expects that the launch delay will cost $100 million in operating losses plus $85 million in additional hardware costs in order to buy additional launch vehicles and insurance. Further, the company projects a $300 million decrease in 1999 revenues.
Globalstar Telecommunications Ltd. (GTL), a general partner of Globalstar, saw its stock continue to fall Friday, after dropping $7.13 Thursday to close at $10.75. Globalstar lead partners Qualcomm Inc. and Loral Space & Communications’ stock rebound slightly on Friday after their stock fell about $5 each. Qualcomm closed on Thursday at $44.50 per share, while Loral ended the day at $13.
Globalstar has been a darling of Wall Street. GTL approved a two-for-one stock split of its common shares earlier this year, the company’s second since its initial public offering in February 1995.
The risk for Globalstar was its use of the Ukranian Zenit II rocket launch vehicle, which had never been used for commercial programs and never launched more than eight satellites at once. Its launch success rate was about 80 percent.
David Benton, manager of public relations with Loral in New York, said Globalstar decided to use the launch vehicle three years ago when its launch record was more favorable. At the same time, access to launch vehicles were tight and Zenit II was available, he said. The cost of using the vehicle also was attractive.
“We were already committed to that launch vehicle,” said Benton. “There is a trade off of risks in launching 12 satellites on one vehicle vs. launching them on three vehicles … There are different philosophies on what is the better way to go. We currently have contingency plans. It is definitely more conservative.”
Benton said the accident in Kazakhstan will push the introduction of commercial service from the first quarter to the third quarter of 1999.
Benton said Globalstar has three firm launches using the Russian Soyuz, a Russian launch vehicle moving into the commercial sector that has about a 97-percent success rate. The vehicle will launch four satellites each in November, December and January. Globalstar also has options for three additional launches that will carry another four satellites each on Boeing’s Delta II launch vehicle and two additional options for Delta II launches during the fourth quarter 1999.
“We have eight satellites in orbit right now. The three firm Soyuz launches would give us 12 total satellites, and we would have 20 in orbit by the end of January,” said Benton. “The Delta II option in May would give us 24, and we’re trying to convert three additional launches that would give us, by the end of May, 36 satellites.”
The company then would begin service in the third quarter of 1999 using a constellation of between 32 and 36 satellites, rather than the 48 originally planned, said Benton. Additional launches may be scheduled for the Delta II vehicle or on Zenit II, depending on the outcome of an investigation into the crash. Globalstar plans to construct a total of 64 satellites, including eight in-orbit spares and eight ground spares.
“We can operate at 32 satellites and offer robust service. By having additional satellites in orbit gives greater capacity. The difference is that we don’t think we need as much capacity on the front end when we start service.”
Tim Logue, telecom analyst with Coudert Brothers in Washington, D.C., said delays give both Iridium and Globalstar time to fine-tune their marketing strategies. Undertakings of these types are unprecedented and implementing a well-organized marketing and distribution strategy will be difficult, Logue continued.
