April 07, 2010 - 8:57am EST by
2010 2011
Price: 1.20 EPS $0.00 $0.00
Shares Out. (in M): 304 P/E 0.0x 0.0x
Market Cap (in $M): 199 P/FCF 0.0x 0.0x
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 199 TEV/EBIT 0.0x 0.0x

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 Thesis: ICO Global Communications (Ticker: ICOG) is a long because we believe that the stock's fair value, based on a probability-weighted analysis of the likelihood that the company prevails in its litigation against Boeing, is ~$1.75, up 40% from its current price. A full win against Boeing could push the stock as high as ~$2.50, or 2x its current price. For reference, a full win in the Boeing litigation should be worth ~$685M (pre-tax, although ICO has significant NOLs), versus ICO's current market cap of ~$320M. It's important to  note ICOG has ALREADY WON the case, it's not a matter of surviving an appeal.

Description: ICO is a next- generation mobile satellite service ("MSS") operator, which planned on launching 12 medium earth orbit ("MEO") communication satellites around 2000. Following the failed launch of ICO's second MEO satellite in March 2000, and subsequent disagreements with Boeing, the manufacturer and launch manager of the ICO satellites, ICO froze its business plan, which remains on-hold today. The vast majority of ICO's current value is in a $600M lawsuit it won against Boeing, relating to the failure of the MEO program, which is currently under appeal. The company's other assets include 10 of the 12 original MEO satellites which are in various stages of completion (including a number in advanced stages), one successfully launched and orbiting MEO satellite ("F2", currently operated and supported by Intelsat), and a 5% stake in DBSD, which is developing hybrid mobile satellite service to provide wireless voice, video, and data service in the U.S. We assign these 'other assets' essentially no value in assigning our valuation.

Litigation Background: ICO and Boeing sued one another in 2004, with Boeing seeking to terminate its contractual obligations to ICO, and ICO claiming breach of contract and wrongful conduct against Boeing for essentially orchestrating the failure of the ICO satellite project for competitive and financial reasons. In October 2008, the Jury found in ICO's favor and awarded the company additional punitive damages, for a total verdict of $603.2 million. The full verdict has been accruing simple interest at a 10% rate since January 2, 2009. Boeing filed a notice of appeal on March 6, 2009, and filed its opening brief on October 26, 2009.

Litigation Analysis: While we strongly urge investors to conduct their own legal review of the ICO proceedings and come to their own independent conclusions, our review of the legal documentation indicates that the market is materially under-estimating the likelihood that most or all of the judgment against Boeing will be upheld. The Boeing verdict is composed of three parts:

  • - Boeing breached the original satellite build contract by failing to turn over information about the project's actual costs, as required by the contract. The jury awarded $279M on this theory. Boeing primarily resists that decision on the ground that the original contract was superseded by later amendments
  • - Boeing engaged in fraud and misrepresentation as it worked to resolve the dispute between ICO and Hughes over the failure to launch the Delta III rockets. The jury awarded $91M on this theory, as well as $29M in punitive damages. Boeing primarily resists by arguing that specific elements of a fraud claim are not satisfied
  • - Boeing engaged in unlawful interference with contract when it influenced how it resolved the ICO/Hughes disagreements over the Delta III rocket launches. The jury awarded $91M in damages on this theory, as well as punitive damages of $177M. Boeing resists on the ground that it was allowed to influence its own subsidiary, and hence there can be no interference

Catalyst: A final verdict by a panel of appellate judges is expected by mid-2011 at the latest, at which point ICO's value should become much clearer.

Valuation: Our ~$1.75 base case is derived by probability-weighting the likelihood that ICO prevails in each of the three parts of the litigation discussed above. Our ~$2.50 upside case is based on a full ICO win. Our downside case, based on ICO losing all aspects of the appeal, assumes that the company is essentially worth zero.

Disclosure: We and our affiliates are long ICOG.  We may buy / sell shares in the future.  This is not a recommendation to buy or sell shares.


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