IRIDIUM COMMUNICATIONS INC IRDM S
December 08, 2009 - 4:57pm EST by
cross310
2009 2010
Price: 8.18 EPS $1.20 $0.85
Shares Out. (in M): 71 P/E 6.82x 9.62x
Market Cap (in $M): 583 P/FCF NM NM
Net Debt (in $M): -148 EBIT 78 116
TEV ($): 668 TEV/EBIT 8.55x 5.75x
Borrow Cost: NA

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Description

Iridium Communications (IRDM) was recently written up as a LONG, but I wanted to send out the SHORT thesis on IRDM.

IRDM is a Ch.11 restart that went public via SPAC (GHL Acquisition Corp.) in Sept. '09. Reportedly, over 25 private equity firms looked at the deal and turned them down - until IRDM received funding from Greenhill-back GHL. Similar to Globalstar (GSAT) before them, IRDM operates a mobile satellite service utilizing a deteriorating low earth-orbiting (LEO) satellite constellation that provides communications to shipping fleets, military and government agencies, news organizations and other users. IRDM plans to replace the current LEO constellation with Iridium NEXT which will require a minimum of $2.7B to replace - launching by 2014 at the earliest.

Currently, IRDM is the only player in the market and derives ~35% of its EBITDA from handset sales at a 40% margin (~$600-700 handset cost). IRDM's wholesales the handset to distributors for ~$1,000. The distributors then retail the handset to end customers for between $1,200 to $1,500. New competition enters the market in 2010. Inmarsat will be the 1st competitor to enter the North American market (the largest)  in late Q2 2010. Inmarsat will be offering a handset at ~$500-600 with aggressive voice/data pricing plans. I believe - at a minimum - IRDM's handset margins will be at risk, or ~35% of EBITDA.

FACT: There have NEVER been a satellite phone coompany - including IRDM - that hasn't gone bankrupt (Globalstar, Iridium, ICO Global, and soon-to-be Skyterra and Terrestar). The one notable exception is Inmarsat (ISAT LN) which was funded by a government consortium.I

FACT: Over 20% of IRDM's revenues come from Stratos Global - one of the larger distributors of mobile satellites products & services. Inmarsat completed the purchase of Stratos Global earlier this year. While Inmarsat has allowed Stratos to operate independently and has implemented a fair channel management policy, I have a hard time believing Stratos will be pushing IRDM's handsets aggressively if  there are enough channel marketing dollars behind Inmarsat's offering.

INVESTMENT HIGHLIGHTS

1) No Viable Business Case: The total global satellite handheld market is estimated at ~1-1.5mm customers worldwide with total market of ~$650mm in revenues - of which IRDM has ~350k customers. This is a niche market that isn't growing.

2) Potential Satellite Constellation Failure: IRDM's current satellite constellation has an estimated useful life until 2014. Interestingly, when IRDM originally went public in the 90s - this exact same satellite constellation had an estimated useful life until 2008. The only difference being then and now - IRDM went bankrupt. IRDM has lost 8 satellites in the last 7 years - since satellite failures follow a 'bathtub curve' - we can expect an accelerating rate of failures going forward.

3) New Competition Entering The Market: IRDM currently owns the satellite handheld market, but new competition is set to enter the market in 2010 with comparable products and aggressive pricing: 

  • Globalstar (GSAT) will launch new satellites by YE10 and return to the North America market
  • Inmarsat (ISAT LN) will have a global lookalike handheld at 1/2 the price by mid-2010
  • Terrastar will have a completely new North America service and a strong desire to grab mkt share

To note, Sprint owned ~5% of the original Iridium, and current Inmarsat CEO Andy Sukawaty ran Sprint at that time. In other words, Inmarsat knows the asset really well.

It is also worth mentioning that George Heyward is a major shareholder in Terrestarr and the personal investment manager/major fundraiser for President Obama. I am just speculating here - but I think Terrestar may get special FCC treatment and/or government contracts/funding.

4) No Satellite Contract In Place: IRDM plans to replace the current constellation with Iridium NEXT - its 2nd generation constellation that it hopes will launch by 2014. Iridium designed NEXT at an estimated cost of $2.7B at a minimum. However, my checks indicate this pricetag may be as much as 20% too low, or ~$3.5B. IRDM expects to fund a majority of NEXT thru internal free cash flow, as well as through 'piggyback payloads' - utilizing excessive launch capacity to launch add'l, smaller satellites. IRDM has appointed Goldman Sachs to help raise the funding gap. As of now, NO contractor has commited to building Iridium NEXT, but Lockheed Martin and Thales Alenia Space are competing for primary contractor. IRDM expects to announce vendor selection by the end of the year - but I am skeptical on timing and their ability to get funding.

VALUATION/CONCLUSION

IRDM currently trades ~5x consensus EBITDA, but I believe a significant portion of this is at risk once new competition enters the market in Q2 '10, though I believe 2011 could see negative subscriber growth potentially.

I believe there is a high likelihood the current generation of satellites will FAIL before the new satellites are delivered -- this would be completely event-driven and NOT in my numbers. There is also a decent chance that IRDM is unable to secure financing AT ALL -- again, there is no satellite contract is in place and there is no visibility on 'piggyback payloads'.

Clearly, the stock will squeeze if IRDM manages to get financing, but I would be adding to my position on the squeeze. Ultimately, I believe IRDM may end up going 'Chapter 22' -- go bankrupt for the 2nd time.

Catalyst

1) No prime contractor in place

2) No financing commitment

3) Satellite failure

4) Competition entering the fray - Inmarsat in Q2 10

 

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