Loral Taking a Beating Over Ownership Stake in Globalstar
Bernard Schwartz is considered one of the savviest chief executives in the aerospace industry, and its best-known iconoclast. But at age 74, there’s a threat that Schwartz’s career could end on a decidedly sour note.
Schwartz earned his legacy building Loral Corp., nearly from scratch, into a major aerospace and defense contractor. Loral’s radar and other defense lines were then bought in 1996 by Lockheed Martin Corp. Its satellite-manufacturing and services group--named Loral Space & Communications Ltd.--was spun off into a separate entity, and Schwartz went with it.
But Loral Space also owns 40% of Globalstar Telecommunications Ltd., and therein lies Schwartz’s potential downfall.
Globalstar is a $4.3-billion venture that recently began providing global telephone service using a fleet of 48 satellites; users will be able to call from anywhere in the world once the system is completely in place.
But the glaring collapse of two other much-publicized multibillion-dollar satellite phone systems--Iridium and ICO Global Communications Ltd.--has tarnished Globalstar’s prospects in the eyes of investors.
The result: The stocks of Globalstar and Loral have been badly punished, and some investors are bailing out entirely. On Thursday, for instance, funds affiliated with legendary money manager George Soros disclosed that they’d sold their entire 5.3% stake in Globalstar, or 5.3 million shares.
This despite Schwartz’s repeated assurances that Globalstar will succeed and that Wall Street should be patient, Schwartz’s own purchases of additional Loral stock and a $60-million advertising campaign.
“But in the last analysis, whatever we say will be unimportant until we demonstrate it with our actual numbers,” Schwartz said in an interview.
Globalstar’s stock has plummeted nearly 80% this year; the stock lost $1.31 a share, to $10, Thursday on Nasdaq. (Financial markets were closed in observance of Good Friday.) Globalstar initially sold its stock to the public five years ago for $4.72 a share, after adjusting for subsequent splits.
Loral’s stock has plunged 67% year to date; it closed Thursday at $8.13 a share, down 38 cents for the day, in New York Stock Exchange composite trading. In fact, both stocks have now dropped so much that some Wall Street analysts say anyone buying Loral’s shares effectively gets its stake in Globalstar free.
Put another way, Loral is trading below its estimated liquidation value. Loral’s net worth--the value of its assets less its debts--is just under $10 a share.
Indeed, Loral’s considerable debt load, which totaled $1.9 billion as of Dec. 31, is another reason investors are skittish about the stock, Morgan Stanley Dean Witter analyst Marc Nabi noted in a recent report.
So, too, is the fact that Lockheed Martin still owns preferred stock convertible into 46 million Loral common shares, or nearly 16% of Loral’s total stock outstanding. Lockheed Martin expects to sell those shares someday, and the prospect of those additional shares eventually flooding the market is one more negative for the stock.
That’s not all. Loral “should have just enough cash to get through 2000 barring any unforeseen needs,” analyst Todd Ernst of Prudential Securities noted recently, yet its debt load and Lockheed Martin’s stock holdings would make it hard for Loral to raise more cash in the public markets.
And in a report last month, Merrill Lynch & Co. analyst Thomas Watts said Schwartz hopes for Globalstar to have 500,000 subscribers by 2001, yet as of last month it had “below 10,000 phones worldwide.” That number will definitely keep rising, but “the question is, how much and when?” Watts said.
Schwartz, though, said that the 500,000-subscriber goal is not a hard prediction but rather represents how many Globalstar telephones will be available from factories by year’s end and that it was a number used as “guidance” to help Globalstar plan its operations. In fact, he’s not making any specific predictions.
“It’s hard for us to come up with any number, and any number is going to be an informed guess,” he said. And subscribers, he added, “are not the issue. The issue is how much [subscriber] usage we have.”
Schwartz won’t comment on Globalstar’s current subscriber count, either, and Morgan Stanley’s Nabi said “lack of visibility of Globalstar’s subscriber and revenue numbers” is “our primary concern.” But Schwartz, who bought an additional 100,000 Loral shares for his own account late in March, said Globalstar is different from Iridium in several ways that should help Globalstar succeed.
For example, Globalstar’s phones--made by Qualcomm Inc. and Ericsson, among others--cost about $1,500, less than half what Iridium’s cost, and Globalstar’s calling rates are lower. Domestically, the rate is roughly $1.50 per minute, versus $3 for Iridium, he said.
Also, Iridium geared its service “toward the VIP roamer, where price was not a factor,” Schwartz said. “Our target market are those middle-class and business/professional users that live and work in areas beyond cellular coverage,” which means millions of additional prospective customers, he said.
Schwartz also emphasized that Globalstar, though already available in the United States and about 36 other nations, is still just rolling out its service.
“Important areas like Russia and China don’t come on until later this month,” he said.
Self-assured, brash and intensely focused, Schwartz is a former accountant who built Loral even though he was an outsider next to the clubby managements of other major defense contractors.
An opponent of the Vietnam War, Schwartz’s contrarian nature also was evident when he built Loral by acquiring dozens of smaller aerospace firms in the 1970s and ‘80s when few others wanted them.
Today, Loral’s basic satellite-manufacturing and services lines remain stout. Its order backlog of $2.4 billion as of Dec. 31 was up 14% from a year earlier. Loral CyberStar, one of its data-services units, now provides access to U.S.-based Internet content to more than 130 Internet service providers in 32 nations.
Yet Globalstar was one of Schwartz’s visions, too, and it’s become one of his greatest challenges. But Schwartz remains as intrepid as always.
“I’m not overly frustrated” by Wall Street’s skittish view toward his companies, he said. “I believe there was an overreaction to the Iridium impact on Loral and Globalstar. But I have every confidence we’ll make up for that by our performance.”
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Loral at a Glance
Loral Space & Communications Ltd. was formed in 1996 when the “old” Loral Corp. sold its defense lines to Lockheed Martin Corp. and spun off its satellite business--Loral Space--as a separate entity. Here’s a look at the company:
* Businesses: Satellite manufacturing, satellite/broadband /Internet services, 40% stake in global-telephone service Globalstar Telecommunications Ltd.
* Headquarters: New York
* Employees: 4,000
* 1999 revenue: $1.5 billion
* 1999 loss: $247 million
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Weekly closes and latest for 2000:
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Thursday: $8.13
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Source: Company reports
