05.14.09
Posted in Financials, ICO/DBSD, Inmarsat, Regulatory, Spectrum, TerreStar at 2:07 pm by timfarrar
The European Commission has announced the result of the S-band MSS selection process: as expected the two winners are Solaris Mobile and Inmarsat, with ICO and TerreStar’s applications rejected.
In response to the announcement, Inmarsat said it was “delighted to be the recipient” and “will look to pursue the commercial partnerships necessary to ensure that the returns from the required investment in our S-band programme will generate acceptable returns on capital without undue risks or uncertainties”.
However, it may not have much time to establish these partnerships, since the EC has stated that “within 30 working days of the publication of the list of selected applicants they shall inform the Commission in case they do not intend to use the radio frequencies”. If applicants decide to move forward (i.e. do not return the license) then they “will be bound by the commitments that they have undertaken, including commitments made concerning consumer and competitive benefits and geographic coverage” and all new systems must have “development and deployment completed” by May 2011 “at the latest”. A two year deadline for deployment is extremely tight, and Inmarsat would have to start spending serious money in the very near future (probably close to $100M in the next 12 months and $300M over the next two years) to complete and launch a satellite in this timeframe.
It will be very interesting to see if Inmarsat can find partners to come up with this amount of money (or enter into some alternative form of capacity purchase contracts) in the next 30 days. Given that Solaris already has a satellite in orbit (albeit with more limited coverage) and has not yet announced any meaningful capacity commitments, it would be quite a surprise if Inmarsat was successful, especially in the midst of an economic downturn.
It remains unclear what sanctions the EC can impose on operators who fail to live up to their “commitments” and ultimately do not complete an S-band satellite on the promised schedule. We would have thought it unlikely that fines or other monetary penalties would be imposed, but coming a day after Intel was fined more than 1 billion Euros by the EC’s Competition Directorate, this may not be a good time to get on the wrong side of the Commission.
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03.19.09
Posted in Financials, Globalstar at 11:08 am by timfarrar
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?
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02.17.09
Posted in Financials, TerreStar at 9:38 am by timfarrar
So Liberty Media has struck a deal to invest up to $530M in Sirius XM, in the form of secured loans, and will receive preferred stock convertible into a 40% stake in the company in exchange for its investment. The first $280M tranche from Liberty will be used to pay off $171.6M in bonds held by Echostar, which are due for redemption today. Subsequently, and subject to “various closing conditions”, Liberty will loan Sirius XM a further $150M and offer to acquire up to $100M of the company’s outstanding loans.
While this means that Echostar’s attempt to acquire Sirius XM has been defeated for the moment, it may be too early to write Echostar off completely. As we highlighted previously, Sirius XM would offer potential synergies with Echostar’s other investments (particularly in TerreStar), which will not be available to Liberty. Indeed other analysts have commented on how satellite radio holds little interest for DirecTV, and in our view, speculation that Sirius XM is a good route into mobile video is completely misplaced. We highlighted back in September 2006 that even if the mobile video opportunity is large (which is now far from certain), satellite radio is a very poor solution for providing the necessary handheld coverage, without deploying a huge number of repeaters. Unless either the Sirius or XM radio service was closed down, it is also unclear that there would be sufficient capacity for a meaningful video service, since both Sirius and XM each have only about 4-5Mbps of data delivery capability within their current architectures.
Instead, we consider that the potential to add two-way (OnStar-like) capability to the in-car service, using Echostar’s other assets (i.e. TerreStar), offers much more long term promise. Viewed from this perspective, Liberty’s investment should be seen more as an attempt to frustrate Charlie Ergen’s ambitions, and acquire the satellite radio service at a very attractive price, rather than a desire to add new mobile services to DirecTV’s offering. Conversely, we shouldn’t rule out the possibility of Echostar coming back with a better offer (or simply acquiring more debt than Liberty would want to buy back), given the much greater synergies available to it from an acquisition of Sirius XM, and the likelihood that Sirius XM will continue to struggle to generate enough cash to meet its debt repayments over the next year or more, while new car sales remain at a low ebb.
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02.04.09
Posted in Financials, ICO/DBSD, Spectrum, TerreStar at 10:50 pm by timfarrar
Its now been reported that Echostar has acquired a substantial portion of Sirius XM’s maturing debt as part of a possible attempt to take control of the company through a forced bankruptcy filing. This doesn’t come as a great surprise given Echostar’s other investments in satellite-delivered mobile TV (in Korea and China), in 700MHz spectrum that would likely be used for mobile TV in the US, and in TerreStar’s MSS-ATC system (where it has stated an interest in using the satellites for mobile video, most recently at the SATCON conference in New York last October). Indeed, a primary reason for the spin-off of Echostar from DISH was to enable Echostar to exploit new business models in mobile entertainment, while the slow growth DISH business would ultimately be sold to a telco or merged with DirecTV.
In our view, satellite radio has always had a far more viable business model than mobile TV, despite the recent downturn in new car sales making it difficult if not impossible for Sirius XM to achieve subscriber growth this year. We believe that satellite radio will remain an attractive feature for car manufacturers in the medium to long term both because the satellite infrastructure is ideally suited to providing a near ubiquitous car-based service with only a limited number of terrestrial repeaters and because the technology is not going to change dramatically over the next decade, avoiding the risk of existing OEM installations being left with no service (as happened to many OnStar subscribers when analog cellular networks were switched off). Compare this to cellular-based navigation and entertainment systems, where technology is advancing very rapidly and an aftermarket solution (or a flexible OEM solution such as Sync) is the most viable option for car manufacturers and end users alike. However, we also view a bankruptcy filing by Sirius XM as highly likely, because it will enable the company to renegotiate its biggest (controllable) expense – that of content rights. While some providers such as talk radio hosts may feel that there is a better deal on offer from terrestrial free-to-air networks, for most sports programming there is no viable alternative to satellite radio as a distribution mechanism, because no other broadcast (audio) medium can offer sufficient capacity and reach to deliver multiple simultaneous games to a widely distributed national audience. Some may argue that internet streaming is an alternative, but 3G and 4G wireless networks are (and will remain) ill-suited to providing continuous in-car coverage (not to mention the difficulty of extracting any revenue stream for content providers other than advertising from such users).
So if Echostar does now move to take control of Sirius XM, how will this fit with its other investments? Most obviously it seems plausible that TerreStar’s satellites could be used to provide a two-way communications channel for future generations of Sirius XM receivers, while Sirius XM’s repeater network could form part (although not all) of the necessary Ancillary Terrestrial Component (ATC) to ensure signal reception for TerreStar in urban areas. This would enable low cost integration of other services into cars, whether desired by the manufacturer (such as over-the-air fault monitoring) or paid for by the consumer (such as an OnStar alternative). Indeed, with the exception of mobile video (which we do not believe is likely to gain traction in cars, for the simple reason that the vast majority of satellite radio use is by solo commuters, who obviously couldn’t watch a video) this sounds surprisingly similar to ICO’s proposed Mobile Interactive Multimedia (MIM) service, and given Sirius XM’s strong relationships with most of the major auto manufacturers, this prospect could make it even more difficult for ICO to move forward with a commercial launch of MIM. Perhaps it might even provide an incentive for ICO to contemplate merging with TerreStar (as has often been rumored in the past)? Certainly Echostar’s interest in satellite radio is likely to shake up the MSS sector as well.
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01.21.09
Posted in Financials, Globalstar, ICO/DBSD, LightSquared, Regulatory, Spectrum, TerreStar at 9:46 am by timfarrar
Last week, the FCC awarded ICO its ATC license, with no requirement to enter into a ground spare contract at this stage. Indeed ICO will only have to demonstrate 30 days before commencing ATC service that “firm arrangements are in place to meet the spare satellite requirement” within 1 year of service initiation. Of course, since a satellite would normally take around 2 years to construct, ICO would have to enter into a ground spare contract well before that 30 day notice period. However, ICO has gained considerably more flexibility to keep its expenditures to a minimum, while pursuing resolution of its litigation with Boeing and waiting for a more favorable economic climate in which to launch commercial service.
With this ruling, along with Globalstar’s ATC license grant last year, the FCC has shown a desire to be flexible in its interpretation of the ATC rules, so as to ensure that ATC deployments do eventually take place. Arguably, this flexibility has advantaged operators such as ICO and Globalstar, over TerreStar and Skyterra (formerly MSV), who have committed to considerably greater capital expenditure, based at least to some degree on a more cautious interpretation of the ATC requirements. Most notably, TerreStar is already well advanced with construction of its ground spare satellite, although we have heard rumors that work may have paused in anticipation of the ICO ruling, and (unless TerreStar gains a European license in the near future and decides to use the satellite there) we expect that construction will soon be formally suspended to save money, on the assumption that this will not impact TerreStar’s pending ATC application.
A future question for the FCC with regard to ATC “flexibility” may well relate to what level of satellite performance is needed to justify that an ATC service is truly “ancillary”. TerreStar and Skyterra have built very large and powerful (and expensive) satellites, in order to deliver voice and data connectivity to “standard” mobile devices without external antennas. ICO and Globalstar’s satellites are rather less capable (and cheaper), but if they are not required to deliver fully reliable handheld satellite voice services, then these satellites could also operate with “standard” mobile devices. For example, if the only test required is to complete a call from a handset on a tripod in an open field, with no head blockage or obstruction from trees etc, then a far less expensive satellite is required than if link margin is needed to overcome these obstructions and the call is made or received by a real person walking around with the phone.
Given that many hundreds of millions of dollars of satellite construction costs are at stake, it will be very interesting to see how the FCC ultimately decides this issue and therefore who has made the right call with their satellite design.
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01.15.09
Posted in Aeronautical, Financials at 10:03 am by timfarrar
United has now joined the North American airlines signing up to fit the Aircell service for in-flight Internet connectivity. Similar to American, it is initially just installing the service on its P.S. business-oriented cross country flights between JFK and LAX/SFO (though American also includes some 767 flights to MIA). Undoubtedly this is a great boon for business travelers, and our experience of the service was excellent. However, to date it looks like overall usage levels are very low, since few leisure travelers are willing to pay $12.95 even for a five hour flight.
On a American SFO-JFK afternoon flight last October, we decided to walk the plane and count the number of users: the result was 8 out of 34 business and first passengers were using it, but only 2 out of about 110 economy passengers. I’m sure American is pleased with this – since the high revenue customers at the front of the plane are happy, but the amount of money flowing to Aircell is far from enough to pay for the network. We understand that to date Aircell has installed the equipment for free, so the only cost to the airline is the fuel to fly it around.
Based on the usage levels we saw, gross Aircell revenue is probably only ~$60K-$80K per plane per year, less even than the $100K seen by Connexion-by-Boeing back in 2006. Connexion had many of the same characteristics – giving away equipment, a high fixed cost network (in that case global satellite capacity leases rather than a national tower network), a large staff, and was also a great service for passengers and airlines. There are a few differences, most notably that the Connexion equipment was much heavier and more expensive than the Aircell terminals, but also that Aircell can supplement its passenger revenues with installations in the business jet market. However, Boeing ultimately decided it couldn’t afford to continue to run the service, as did Claircom, Airfone and others with their earlier voice services. In the current financial climate, we wonder if Aircell’s network will be able to avoid the same fate? Certainly they seem a long way from the prediction of 2000 equipped aircraft by the end of 2009 made by Aircell’s CEO last summer.
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11.03.08
Posted in Financials, ICO/DBSD, Spectrum at 12:47 pm by timfarrar
After the punitive damages phase of the ICO-Boeing lawsuit, it looks like the total damages awarded to ICO (including interest) will be approximately $707M. The question now facing ICO, assuming it is able to settle the case and collect something approaching this amount (which is by no means a foregone conclusion since Boeing has stated that it will appeal and according to ICO it would likely take two years for such an appeal to run its course) is what to do with the money.
Broadly speaking there are three things that this money could go towards:
1) Repayment of the ICO North America convertible bonds (which total $767.7M including interest and are due in August 2009)
2) Bringing the Mobile Interactive Multimedia (MIM) system into commercial operation in North America by 2010 (which ICO has stated will require about $700M of further investment)
3) Investing in completion of the global MEO system, which ICO is attempting to retain its license for in Europe (or conceivably even switching to a new GEO system in Europe, similar to the change ICO made in North America).
The most interesting issue is that the convertible bondholders do not actually have any rights to the proceeds of the Boeing lawsuit, since they have invested in ICO North America, not the ICO Global parent company. As such, their only security is the North American GEO satellite, the development work towards MIM, and the associated spectrum licenses. If ICO decided to sell these assets on the open market, it is entirely possible in the current financial market that it would realize far less than the $767M due on the bonds. However, it seems rather unlikely that ICO Global would simply put ICO North America into bankruptcy and keep the lawsuit proceeds for the parent company. Presumably they might instead attempt some swap of the ICO North America debt into ICO Global equity at a discount to the $767M face value of the bonds. This seems especially likely if there is a delay in concluding the Boeing lawsuit and so ICO’s available cash is limited, and appears to be the approach indicated on ICO’s conference call today.
ICO also remained tight lipped on the conference call about priorities for North America vs Europe. However, in terms of moving forward with ICO’s satellite system, its hard to see that it would make sense to prioritize a new deployment in Europe in preference to bringing the existing North American system into full commercial operation. It seems doubtful that there is a particularly positive business case for Solaris or Inmarsat’s proposed European S-band project, let alone for a new entrant such as ICO, and ICO seemed to hint on the conference call that it would focus on its current single MEO satellite as the reason why it should be entitled to a European license. However, even the future for MIM in North America is questionable in light of Toshiba’s decision in July 2008 to shut down the equivalent MBCO service in Japan next year and ICO emphasized its intention to pursue fiscal restraint, delaying commercial service until the economic and financial environment improves.
Thus, as we’ve speculated before, it looks like ICO will continue to wait and see whether cellular operators eventually decide to acquire MSS operators such as ICO to get hold of their spectrum, perhaps revisiting the handheld MSS market in the meantime. It now seems probable that ICO will be able to outlast TerreStar and thus it could also perhaps hope to acquire TerreStar’s assets and spectrum in the future at a very attractive price, creating a more compelling spectrum platform for terrestrial partners.
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10.09.08
Posted in Financials, ICO/DBSD, Inmarsat, Spectrum, TerreStar at 10:52 pm by timfarrar
We now know that there are at least four applicants for the European 2GHz MSS spectrum licenses, namely Solaris (the SES-Eutelsat joint venture), Inmarsat, ICO and TerreStar. Applications were due by October 7, and the first phase of the selection procedure (identifying which applicants are technically and commercially “qualified”) should be completed in the first half of 2009. There are 2x30MHz of spectrum available, which is sufficient for 2 or at most 3 applicants, so the current list of applicants will certainly have to be cut back during the selection process.
Perhaps the most surprising application is that from TerreStar, given that it has to date failed to raise external funding for TerreStar Global (its European venture) despite attempting to do so over the last year. TerreStar may calculate that it has little to lose, since it has committed several million dollars to EADS for initial preparatory work and it has already signed a launch agreement with Arianespace. From this point of view, its financial commitments to the European project to date are equivalent to those of Inmarsat (which has stated it will only spend “single digits millions of dollars” on “business development activities” prior to securing a license), although of course TerreStar does not currently have sufficient funding available to complete construction and launch of a European satellite, in addition to its two North American satellites (one of which is a ground spare). However, since both Solaris and Inmarsat strongly prefer 2x15MHz over the 2x10MHz which a three way split would imply, we assume that if TerreStar’s application was approved, it might subsequently seek to team up with one of these two competitors, rather than pursuing a standalone project. For example, Solaris has already indicated that it may acquire a follow-on satellite to the Eutelsat W2A to offer wider pan-European coverage.
Its also worth noting that in addition to putting in an application, ICO is separately seeking to challenge the legality of the EU’s licensing process, in an attempt to preserve the spectrum priority rights of its MEO satellite that was launched in 2001. ICO had been hoping to know the outcome of its litigation with Boeing before the European 2GHz applications were due, but to date it appears the jury has not reached a verdict (after three weeks of trying). Clearly, given the amount of money at stake, this litigation will have a significant impact on how ICO decides to move forward from here on.
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09.23.08
Posted in Financials, Globalstar, Inmarsat, Iridium at 11:05 pm by timfarrar
Despite several successful fundraising deals this year by Globalstar, TerreStar and MSV, Iridium’s deal with GHL is noteworthy as the first investment to directly validate the potential of the MSS market in the absence of spectrum upside, since Iridium cannot free up significant amounts of spectrum for an ATC play.
However, there is no direct read across to the MSS market potential for other players, since Iridium and Inmarsat are the only MSS operators that can provide truly global service across the oceans and thereby address the maritime and aeronautical segments that account for roughly half of wholesale MSS service revenues. These markets segments continue to grow strongly, particularly for broadband communications, and we expect Iridium’s next generation system to be designed to compete more directly with Inmarsat for maritime and aeronautical broadband customers. Combined with moderate progress in land-based handheld and low data rate MSS markets, Iridium should be able to grow its revenue and subscriber base over time, despite increasing levels of competition from new players such as ICO, and Inmarsat’s entry into the handheld MSS market.
Where we can draw some conclusions for other players is on the maximum amount Iridium could afford to pay for Globalstar in the event of a merger, given the value placed on Iridium in this transaction ($591M). Given that Iridium’s revenues this year will be about three times those of Globalstar, and that Iridium presumably does not ascribe value to Globalstar’s ATC opportunity, it seems likely that Iridium would place such a low valuation on Globalstar as to all but rule out any prospects of a negotiated deal between the two companies. At least in this case, it therefore looks like we won’t see a merger being agreed any time soon.
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09.16.08
Posted in Financials, ICO/DBSD, TerreStar at 9:04 pm by timfarrar
TerreStar announced today that it has sold its remaining stake of 29.9M shares in Skyterra to Harbinger and other investors for a total of $123M. This will meet TerreStar’s capital needs into 2010, well beyond the delayed launch date for TerreStar’s first satellite in 2Q2009.
We find it particularly interesting that this transaction took place in the week in which ICO’s ongoing lawsuit with Boeing has gone to the jury for a decision. There has been speculation in the past that eventually ICO and TerreStar will merge, to secure a much improved spectrum position, and a key challenge in determining the value of ICO’s business has been the uncertainty in respect of the Boeing lawsuit. ICO faces a deadline of August 2009 to refinance over $750M in convertible bonds, so we wonder if the upcoming resolution of this lawsuit might provide a catalyst to restructure and merge with TerreStar. Certainly TerreStar’s actions in obtaining further funding would help to strengthen its position in any such negotiations.
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