On Monday, March 16, Globalstar filed an NT-10K, stating that it was “unable to file its Annual Report on Form 10-K for the year ended December 31, 2008 within the prescribed time period…because certain information regarding its available sources of liquidity is not available at this time and may materially affect the disclosure to be contained in the Annual Report”. We’ll see in the next two weeks what this information turns out to be, but it’s not surprising that Globalstar’s sources of liquidity are of significant concern to the company, given that it needs to raise substantial additional funds in the next few months to complete construction and launch of its first six second generation satellites later this summer.
As of September 2008, Globalstar expected to need about $260M (at today’s exchange rates) in the following 12 months to meet existing contractual obligations (excluding satellite insurance and any operating losses), and only had $100M of available liquidity including the escrow account, although since that time, Thermo has injected a further $50M into the company. This leaves Globalstar needing to raise perhaps $150M to meet all of its obligations over the next six months, assuming the escrow account is drawn down significantly (but not to zero) during that time and that it is unable to defer any of the payments that are coming due.
In our view there are three obvious potential sources of liquidity which could cover some or all of this funding requirement:
1) Further injections of capital from Thermo Capital (run by Jay Monroe, the company’s CEO), in addition to the $450M or so already invested in the company
2) Access to the restricted funds in the satellite construction escrow account with Thales Alenia Space, which Globalstar indicated last November it may seek to access if Thales Alenia agreed to this
3) One or more new strategic investors, through some partnership to exploit Globalstar’s satellite and spectrum assets.
A possible fourth option, securing new financial investors, seems less likely to materialize, given that investors in the convertible bond issue last year have not fared well, and the current economic climate makes it very difficult for almost everyone to raise money.
We’re therefore waiting with bated breath to see what happens with the eventual 10-K filing and whether Globalstar continues to defy the skeptics and secure the necessary additional liquidity. Most intriguing is the possibility that a new strategic investor will emerge, although its hard to guess where such a partner might come from. Perhaps Satellite 2009 next week will provide the catalyst for a major announcement by Globalstar?
Although the European S-band spectrum allocation process is well underway, its looking increasingly possible that there might never be more than one satellite system actually built to use this spectrum, namely the Solaris payload to be launched on Eutelsat W2A later this year. Amongst the other three entrants to the spectrum allocation process, ICO and TerreStar’s financial situation already makes it difficult to see them being able to fund construction and launch of new European satellites, although ICO maintains its legacy claim to the spectrum (by virtue of the MEO satellite launched in 2001), and has vigorously protested Ofcom’s planned cancellation of its registration in the ITU’s Master Frequency Register.
On Inmarsat’s results call today, the company was explicit about its intention not to “put its balance sheet at risk” to build its proposed EuropaSat S-band satellite, and when the CEO was asked about whether he would adopt a “build it and they will come” approach, he replied “absolutely not”. Inmarsat instead plans to seek external investors to fund the project, and ultimately to spin it off as a separate company. The contrast between Inmarsat’s description of its Alphasat project as bringing more capacity in the EMEA region, more spectrum and more redundancy to support future growth, and EuropaSat as a “non-core” project, was particularly striking.
While Inmarsat highlighted that EuropaSat could have interesting prospects in satellite radio as well as mobile TV, Ondas (which now looks to be the most likely vehicle for satellite radio development in Europe) has been growing closer to Solaris in recent months. This comes despite SES’s earlier skepticism about the prospects for satellite radio in Europe, and presumably reflects the very dim outlook for satellite-delivered mobile TV in Europe and elsewhere. Its therefore far from clear where Inmarsat might find the partners needed to fund EuropaSat, especially in such difficult economic times, and we believe it is now plausible (and perhaps even likely) that even if Inmarsat is awarded a license by the EU later this year, the EuropaSat satellite may never be built.
Ironically, the EU’s allocation rules don’t appear to envisage such an outcome, focusing instead on how to resolve a spectrum shortage and restricting any one operator to at most half of the 2x30MHz of spectrum available. In these circumstances it is quite possible that some of the spectrum might eventually end up being reallocated to terrestrial 3G networks instead of satellite services, as happened in North America back in 2003.
Its been revealed today that EMS has taken a $3.4M charge to terminate its work on the Inmarsat next generation satellite phone, and that Inmarsat will be assuming “more control over production phases of the product development”. This is the latest in a long line of setbacks for the ISatPhone, with the first generation phone failing to achieve any meaningful traction and repeated delays in completion of the next generation phone since Inmarsat acquired the ACeS customer base two and a half years ago.
In our view, a key reason for the failure of the original phone was its poor performance on the Inmarsat I4 satellite, with users advised to use a hands-free kit and keep the phone antenna pointed at the satellite! It remains unclear if EMS had solved these technical challenges with the new phone (which are caused by the smaller 9m antenna on the I4 satellites, compared to the 12m antennas used by Thuraya and AceS), and therefore it is quite possible that serious constraints may still apply to the usability of Inmarsat’s new handheld, a concept model of which is shown below. Certainly we expect that it will be difficult if not impossible for Inmarsat to ensure satisfactory handheld performance in Alaska and much of Canada.
The launch of the new phone had already been pushed back from early 2009 to the end of the year, with features such as packet data dropped to save time and money. Now it looks like Inmarsat will experience a further delay until well into 2010, and yet another increase in costs, adding to a development program which already totals around $100M. We will be looking with interest at whether Inmarsat maintains its stated intention to sell the phone for around $500 retail, thereby making it even harder to recover its investment in handset development. Notably, this price point has already met with pushback from potential distributors, who would be unable to realize the margins they make today on the sale of other satellite phones.
The clear winner is Iridium, who will have even more time than they had expected to capitalize on the lack of handheld competition from Inmarsat, and who managed to complete the development of their new 9555 phone on time and at a cost of less than $10M. Other current and potential satellite handheld providers, such as Globalstar, Skyterra and TerreStar, who have faced a barrage of criticism from Inmarsat in recent months, will also be rubbing their hands with glee at Inmarsat’s embarrassment.