Description

Idea: Long GSAT – Globalstar

NOTE: Super Speculative - only advocating a small position size.

Price: $0.63

Valuation Range: $0.00 - $5.00

"Bet $1 to win between $3 to $7"

Thesis:

With the final 2^nd Gen satellites launched and in service, the company can rebuild the satellite voice business and expand the M2M data business. 

The major catalyst for the business, however involves their spectrum assets.  GSAT controls 22MHz of very high quality spectrum in the 2.5Ghz range, which sits right next to channel 11 in the Wi-Fi band. 

They have petitioned the FCC to allow for that spectrum to be used for terrestrial services, and are waiting the issuance of a Notice of Proposed Rulemaking (NPRM).

This is a second step toward the path of approval. After a comment period, the rules would be finalized in a Report & Order (R&O).  

From our conversations with experts in Washington, it seems clear that the FCC wants to get MSS spectrum repurposed for terrestrial broadband. 

The odds we think are quite good that GSAT’s spectrum will be approved, but the timing is uncertain.  This is a similar process that DISH underwent most recently with respect to their spectrum assets.

If approved, at a minimum this spectrum could be used for LTE services and could be valued in the $0.30 per MHz-POP range. 

However, there could be higher value uses for this spectrum. With a minor over the air firmware upgrade, the billions of Wi-Fi devices already in service would be able to see utilize this spectrum. 

It’s hard to know exactly what it would be worth, so we provide a range of values based below.  One scenario, at a $0.55 per MHZ-POP valuation the stock could be worth $2.95, nearly 350% higher than current prices.

However, this investment is not for the faint of heart.  It is a speculative position/lottery ticket, and should be sized appropriately. 

The cap structure is quite messy and loaded with debt, and the core business (while EBITDA and cash flow positive and growing) cannot support the current enterprise valuation alone. 

Without a realization of value from the spectrum assets, we believe the equity will be worth-much-less.

Cap Structure

All amounts are as of 6/30/13 which is post the recent debt restructuring.

Common Shares:

Warrants/Options:

Debt Overview:

Cash Overview

Future Commitments

Spectrum Opportunity

There is plenty of material on the Globalstar website that you can review and they do a good job of explaining their spectrum assets and what it could be used for. 

I encourage you to review that material (links will be provided below) in addition to this writeup.  I’ll simply post some highlights and commentary below and links to material on the web. 

This is a similar process that DISH went through to get their spectrum assets approved for terrestrial use.

We obviously do not have any inside knowledge on how the FCC is going to rule on this nor the timing. A negative ruling would be, in no uncertain terms, not good for the stock. 

A delayed ruling could also reduce the value of the spectrum depending on other spectrum being approved first, etc…

The company has said they expect to receive an answer from the FCC “any day now” (however, it has already taken longer than they expected.)

Most recently, Amazon was reported to be testing the GSAT spectrum.

 http://www.ntca.org/new-edge/wireless/amazon-globalstar-test-transformative-wireless-application-reports-say

 http://www.fiercewireless.com/story/report-amazon-testing-wireless-network-using-globalstars-spectrum/2013-08-23

There core business model for the spectrum is in a Nationwide small-cell rollout of a 'private Wi-Fi' network.  

This could be done by cable operators to wireless carriers, or by folks like Amazon or Apple looking to have more control over the users experience.  

The key is that this spectrum is able to tap into the existing Wi-Fi ecosystem and take advantage of low cost chipsets.  

The great benefit of the Globalstar spectrum is that it sits near the Wi-Fi spectrum which means there is an existing ecosystem of devices and chips

that with only minor tweaks (over the air firmware upgrades) would be able to see the Globalstar spectrum. 

This means the cost of the equipment needed to utilize Globalstar’s spectrum is significantly lower than spectrum in other bands that do not have a pre-existing ecosystem.

As you can see in the valuation below we have provided a range of values for the Globalstar spectrum from $0.20 per MHZ-POP (roughly what’s included in the current stock price)

up to an aggressive $1.00 per MHZ-POP (which could be upwards of $5.00 per share roughly 700% upside.) 

It’s tough to get a perfect comp but we think the ranges provided ($0.20 to $1.00 per MHZ-POP cover comparable transactions with a $0.30-0.50 range being most likely).  

The company believes it's spectrum would be worth more than Clearwire's because of the ability to leverage the existing Wi-Fi ecosystem.

Spectrum Risks:

A delayed approval may reduce the value of the spectrum if alternative spectrum (3.5GHz, TV White Space spectrum, etc…) is approved and can more/less get the same job done. 

If alternative spectrum is approved and chipsets are designed and embedded into devices, that could limit the value of the Globalstar spectrum. 

That said, there will still be a spectrum shortage, so there will be value for GSAT’s spectrum asset whenever it gets approved.

Already this process with the FCC has taken longer than GSAT has hoped.

It appears that the NFPR is not on the tenative agenda for the FCC.  Which could mean the issue will be left for the incoming Chairman Wheeler to deal with, which could pose further delays.

http://www.fcc.gov/document/fcc-announces-tentative-agenda-september-open-meeting-0

There are already some concerns/comments from Microsoft, Bluetooth, and others.

A request by AT&T and Google that is urging the FCC to move forward with an allocation of the 3550-3650MHz spectrum.

And some concerns that there legacy BAS users experience some interference.

http://apps.fcc.gov/ecfs/document/view?id=7520937077

 http://apps.fcc.gov/ecfs/document/view?id=7520936221

 http://apps.fcc.gov/ecfs/document/view?id=7022301056

http://apps.fcc.gov/ecfs/document/view?id=7022102523

http://apps.fcc.gov/ecfs/document/view?id=7022104513

Spectrum Precedents

The average of the “nationwide” spectrum transactions is $0.95 per MHzPOP, which would be an absolute home run for GSAT were it to receive a similar valuation. 

There are clearly differences in the other spectrum assets, but we think they are similar enough to provide a decent comp.

James Monroe (CEO) Comments from Q2 2013 Transcript:

Company Resources:

http://www.globalstar.com/en/index.php?cid=6200

http://www.globalstar.com/en/ir/docs/FCC12-Petition_for_Rule_Making_Nov_13th.pdf

http://www.globalstar.com/en/ir/docs/FCC%20Presentation%20(June%202013)%20FINAL.pdf

http://www.globalstar.com/en/index.php?cid=7010&pressId=783

http://www.globalstar.com/en/ir/docs/Globalstar_Webinar_Presentation.pdf

 News from Oceus Networks looking to test GSAT's spectrum

https://apps.fcc.gov/els/GetAtt.html?id=140917&x=

Valuation & Fully Diluted Shares

• Note, we are ascribing little value ($50mm) to the core MSS business for GSAT.  This is likely a very conservative valuation.  
• However, even a more aggressive valuation won’t move the needle in a meaningful way.  The key factor for this stock’s potential upside is in the spectrum assets.

Core Business

Overview

Service Revenue (Q2 2013)

Duplex: $5,363

SPOT: $6,853

Simplex:$1,634

IGO:$256

Other: $1,303

Total: $15,409

Hardware Total: $4,426

Total: $19,835

Subscribers:

Duplex – 84,423

SPOT – 216,469

Simplex – 213,726

IGO – 40,158

Other – 6,976

ARPU:

Duplex - $21.29

SPOT: $10.69

Simplex: $2.70

IGO: $2.11

Duplex – Land Only Voice Business.  (Does not work over the oceans by design).

Their satellites are like “mirrors” where the signal goes up and then bounces down to a ground station and the call is then carried over fiber. 

Their satellites are in the Big LEO (low earth orbit) so the signal does not need to travel as far as other competing satellites.  As a result of the design GSAT has a very high quality voice product.

In 2006 the business had 120k subs, now only 84k.  They had degradation issues with old satellite and lost 20,000 customers. 

Additionally the customers that remained used the service less and less.  IRDM came in and stole some market share. 

But they have since resolved their satellite issues with the new constellation that has been launched and is in service, and are starting to grow again.  

Existing customers are using the service more (+41% increase in minutes of use and a solid increase in subscribers in Q2 2013), and they’re clawing back and winning market share. 

The constellation is global, but most effort has been in the US/Canada.  They intend on growing in other territories in the near future.

Their largest market is in the enterprise (forestry, mining, oil/gas, first responders, dept of interior, etc…). 

Qualcomm manufacturers all the phones.

Annual voice service plans run from $300-1800.  At $1,800 per year, you get unlimited minutes.   

Keep in mind, nearly 50% of the land mass does not have great cellular coverage in the US.  So this service is a must have for some enterprises.

Simplex – enterprise M2M data business

Their service is 1-way data.  So there is not a two-way communication opened up for the M2M service. 

This is a low cost service ($2.50 ARPU) that could allow the customer to receive tracking information. 

They compete with IRDM and ORBC in this market, although in the Q2 2013 call they commented how they are partnering with ORBC more and more.

SPOT – personal M2M & Voice

The primary products include the spot Gen3 messaging device and the SPOT Global Phone.  They are sold through 10,000 retail locations. 

Additionally the company is coming out with a “personal M2M” device that would allow individuals to “track” various personal assets much like enterprises do today.

http://www.findmespot.com/en/

Risks

• The cap structure is messy and it is loaded with debt.
• It’s a bit of a binomial type investment with respect to the spectrum assets
• Failure to receive approval for terrestrial use of spectrum assets will result in significant decline in stock price.

Debt

The company has recently restructured its debt obligations and has deferred principle payments.  No significant payments until 2016.

Holders:

The company is effectively owned/controlled by the CEO James Monroe through his private equity company Thermo Capital.

Insiders control 70.8% of the stock.

Some Other Links

http://en.wikipedia.org/wiki/Globalstar

http://www.thermotelecompartners.com/

Catalyst