Equity
Analysis 9/28/09 Company:
GlobalStar Asset
Class: Common Equity Recommendation: Long Expected
Timeframe: Six months to one year Geography: Global Country: United
States Situation: Special
Event / Deep Value Brief GlobalStar (GSAT) is a commercial provider of satellite data
communications that markets mobile data solutions to a variety of sectors
including maritime, government, and oil. In 2007 they entered into the consumer
market with the launch of SPOT, a handheld GPS device that uses their simplex
data network to send out tracking information on demand, and has one touch
S.O.S. buttons. GSAT is priced at a significant discount to fair value, and
represents a tremendous upside opportunity for speculative investors when
information below is taken into account. Market
Pricing GSAT is currently trading at 18% of its book value. This is
a reflection of three factors: 1) The wealth
of mobile satellite service bankruptcies early on in the decade precipitated
investor aversion to the technology—sector is no longer sexy. 2) GSAT has
been suffering from ŇanomaliesÓ since 2007, a result of 9 year old satellites
that have led to dropped calls, complex scheduling tools, and diminishing end
user efficiency which has eroded GSATŐs market share overseas. 3) The
company has been forced to dramatically cut costs and introduce limited-time service
plans designed to retain subscribers in the short-term, in anticipation of the
launch of their new second-generation satellite constellation. Upside
Potential GSATŐs position in the MSS market is about to change
dramatically. The company is launching its second generation constellation in
the next six months which will not only make it the most technologically advanced
MSS company in the market but will also lay down the necessary infrastructure
for a variety of new opportunities. These new satellites have significantly
larger pipelines, and equate to an increase in bandwidth and user breadth. The
satellites will also allow associated devices to engage in push-to-talk
connectivity, send mobile video and multimedia messages, as well as incorporate
a variety of IP-Based solutions. GSAT is also reorienting itself towards the
consumer sector with marked success. SPOT has driven substantial growth (see Spot Data) in the last two years in the
companyŐs Simplex subscriber base. The device has received six awards for
innovation since 2007. GSAT is also the first MSS to receive consent from the
FCC to lease its Ancillary Terrestrial Component spectrum to third parties, and
has already engaged an agreement with Open Range to bolster its wireless 4G
connectivity to rural users (see Terms
with Open Range). Finally, the companyŐs recent change in management
provides a proven record of success in satellite and consumer marketing for the
launch of the second-generation fleet and additional consumer products (see Additions to the Board). Financials The company currently has $306 million in liquid capital
as of August 5th. This consists of: - $16 million in cash - $15 million in a reserve debt service account - $215 million remaining from a COFACE loan facility - $60 million in funding provided by Thermo Funding LLC The $215 million COFACE facility is the remainder of the $586
million loan taken on in July. Of the net $738 million GSAT raised in July, $670
million was committed to a contract with Thales Group to finish and launch the
second-generation satellite constellation. The company is currently endowed
with $91 million in liquid cash which is enough to sustain operations comfortably
for the next 18 months based on a current average operating cost of $49.34
million a year. This does not include projected growth in revenue and other
associated factors described below. Overall, the company is at the very least
positioned to see the results of its second-generation fleet, due online in mid
2010. James Monroe III is a partner at Thermo Funding, which
owns a 69.9% stake in GSAT. Monroe also served as C.E.O. of GSAT in 2004. Thermo
is dedicated to padding GSAT with financial security until the company begins
operations under its new fleet. On June 19th, Thermo Funding
exchanged $180 million in securitized debt for a Series A Convertible Preferred
Share. This share can be exchanged for 126,174,034 shares of Common Stock.
Thermo has already sustained a 46% loss on this move based on the current share
price of $0.80, although they had a paper profit of over 100% shortly
thereafter when the stock surged to $2. Reinventing the Corporate Image GSATŐs entrance into the consumer market is a significant
dichotomy from its traditional corporate and industrial subscriber base. This
is an effort to reshape the company in a positive image, given the industryŐs
history and GlobalStarŐs bankruptcy at the beginning of the decade. Even
despite significant technological setbacks in the past two years which have
rendered much of the companyŐs two way data service inferior to competitors, GSAT
has managed to lose a mere 9229 subscribers out of nearly 120,000 from
2007-2009. This was precipitated by the Evolution Pricing Plan, which presented
end users with a significant price reduction. This also drove down ARPU
(average revenue per unit on a monthly basis) by 47% in the same time period,
which has had a significant influence on the cash burning present on their
balance sheet. GSAT developed this plan to stave off cancellations, albeit
painfully, in anticipation of their new fleet. The Evolution Pricing Plan is
set to expire March 2010, at about the same time when the new fleet will go
active. The company will then have two options: maintain competitive pricing
and increase subscribership, or introduce advantageous pricing terms for GSAT
with the introduction of new features and improved functionality on the new systems.
As another matter of importance, a judge recently
dismissed a lawsuit against GSAT alleging misconduct during the IPO, as
investors claimed they were not appropriately informed of the rapidly declining
viability of the first-generation satellites. Catalysts Additions to the Board Recent changes on the executive team provide a strong
foundation for oversight in the crucial process of launching the second fleet. Jeff Dalton: Mr. Dalton was recently
appointed as C.E.O, and has served GSAT since 2004. As CEO of KLM Electronics,
once the worldŐs largest maker of satellite television dishes, Dalton grew
revenue by 25x. At the September 23rd shareholder meeting, a new
equity incentive plan was granted for Dalton. Dalton was awarded 3,000,000
options with half exercisable at $0.83, and the other half exercisable only
when the stock trades above $3.00 for a matter of 20 days. William H. Hasler: Mr. Hasler was Dean
of the Haas School of Business at University of California, Berkeley, from
1998-2004, and specializes in marketing products to consumers. Spot Data Data on the latest balance sheet demonstrates that even
while suffering from oppressive technological setbacks, GSAT was able to
increase its subscribership by a substantial sum in the past two years.
Currently, GSAT has 371,483 subscribers, an increase of 18% year over year. This
growth was fueled by a 60% jump in Simplex users, which reflects the positive
reception of SPOT since its introduction in 2007. In the last two years,
Simplex subscribers have grown from 71,650 to 189,879—a 165% increase. The company is now earning a much larger share of profit
from its Simplex services. These have not been affected by the degradation of
the first-generation satellites. From 2007-2009, the ARPU for the Simplex
service increased from $2.84 to $5.53. This represents a 94% growth in revenue.
This is not evident on their balance sheet, which has been dragged down by the
Evolution Pricing Plan designed to retain the corporate and retail users of the
two-way satellite service until the GSAT 2.0 launch. The company is building on the momentum of the SPOT
reception. As of August 26th, the SPOT device is being sold in Best
Buy stores around the world for $99. The Simplex service for the SPOT device is
also $99/yr. From 2008-2009 the cost of producing service equipment fell by
28%. If a similar trend continues, this will equate to an ARPU in the range of
$8.30. By mid 2010, the company will already have a substantially
larger SPOT subscribership. Using a conservative growth rate of 40% yr/yr, the
company will have 237,348 Simplex subscribers. GSAT has been planning for this
with recent infrastructure updates that increase its system capacity by 10x. This
will produce $17,089,056 in new service revenue alone based on an ARPU of
$6—an 8% growth that is achievable if costs continue to decline. The
reduced cost of subscriber equipment and increased purchasing of the SPOT
devices will strengthen their bottom line significantly. Terms with Open Range GSAT has already leased its ATC spectrum to broadband/wireless
connectivity agent Open Range. The terms are as follows: 1) Open Range is to pay GSAT a $2.2 million down payment. 2) Open Range will pay service fees each year that are expected to
total $10.1 million/year by 2016. Projected Price Assuming a stagnant or modest decrease in retail users in
the next six months, coupled with a 40% yearly growth rate in Simplex users,
the company would earn $14,696,580 in service revenue from Simplex alone. Coupled
with a modest reduction in duplex and retail services of 5% the net service
revenue for the six-month period would be $31,079,288. This would compare with
service sales of $23,693,000 for the six-month period ending June 30th,
2009. Based on data for total
revenue in the six-month period ending June 30th, 2009, GSATŐs current
P/S for the timeframe is 3.62. Holding equipment revenue flat to account for new
purchases of SPOT combined with a reduction in retail purchases of duplex
hardware, a new P/S can be calculated based on the following: $31,079,288
net service revenue + $6,336,000 equipment revenue = $37,415,288
sales This represents a 21% increase year over year. Assuming a
constant market cap, the new P/S for this period would be 2.99. With current
valuations for the stock standing, this would equate to a stock price at the
very least of $0.93 per share. However, GSAT currently trades at nearly half
the industry median P/S. Scaled to this extent would represent a price of
$1.86. Catalysts -New Board with experience in the consumer market. -Secured
loan to complete and launch the second-generation network. -Extensive
growth and potential for SPOT within the consumer sect. -Corporate
incentive for a $3.00 + share price. -Capital
inflow through leases of transmission spectrum to Open Range. -Termination
of painful Evolution Pricing Plan, although it has increased retention dramatically in a period of
considerable strain. -Infrastructure
has already been developed and paid for to support substantial increases in
subscribership. Risks -Unpopular
reception of new SPOT form factor -Thales
Group encounters hardship and is unable to complete satellite construction
(unlikely). -GSATŐs
launch contractor improperly sends out the satellites and renders part of the
new fleet impaired or junk (small possibility—happened during the first
launch). -Lukewarm
or stagnated reception to second-generation satellites would result in almost
certain liquidation from Thermo Funding. -Thermo
Funding sells its share to cover a hardship in their portfolio. -Share
dilution via outstanding warrants (although anti-dilution measures exist).
