- Two weeks ago short fund Kerrisdale started a campaign against GSAT. Their presentation was a good show but disappointing on facts.
- GSAT shares are oversold – down more than 50% in last two weeks.
- Good opportunity to buy before the forthcoming catalysts.
On Wednesday 1/10 a rumor was circulated that Kerrisdale, a prominent short fund, would host a presentation on its Globalstar (NYSEMKT:GSAT) short position on Monday 6/10. Based on the rumor the shares went down by 20%. Kerrisdale delivered a good show, which pushed the share price down by an additional 20%. GSAT management than had their presentation on 9 October. The presentation came in the midst of global sell off and failed to lift the price.
Introduction to Globalstar
Globalstar is the fourth largest global satellite phone company. It has invested over 1 bln into global satellite network. Prior to Kerrisdale attack, it had market value of 5 bln and debt of 700 mln USD. Its annual EBIT is about 20 mln USD.
Since 2004 Globalstar is controlled byThermo Capital Partners, who has around 70% stake in GSAT. Thermo invested over 600 mln USD in Globalstar and Thermo chairman Jay Monroe, is Executive Chairman & Chief Executive Officer at Globalstar.
The current satellite phone business does not justify the GSAT valuation. The whole value of the company may be in its Terrestrial Low Power Service (TLPS) – it is as Kerrisdale puts it “nothing more than one exclusive, licensable Wi-Fi channel”. GSAT is expecting a green light from FCC to execute the project by the end of the year.
Who is right – longs or shorts?
The key question on which the longs and shorts disagree is: is TLPS an asset and if so, what is the value.
The GSAT management and the analysts argue the following:
- There is an increasing WIFI congestion in the USA
- TLPS is a cost efficient tool to address the issue
- TLPS could be very quickly put into operation
- TLPS should be attractive for certain big players, such as Google to operate a private WIFI network in the US
- TLPS is, therefore, clearly an asset. Odeon Capital in its April research listed six valuation methods to value TLPS, which generated a range of $3.38 to $10.19. Based on this they assigned buy rating with $5 price target.
Kerrisdale clearly argues that TLPS is not an asset, and even if it were, it would have a zero value. Their arguments can be simplified to four basic propositions:
- Nobody has ever made money in satellite communications and GSAT would not either.
- Nobody would pay for GSAT product.
- The TLPS 2.4 GHz is an obsolete technology due to arrival of 5 GHz technology.
- The network that GSAT is building has zero value mainly because it would be too costly to build.
After listening to all webcasts and reading all the research, my view on Kerrisdale arguments is:
- It might be true that others did not make money. On the other hand GSAT is coming up with a different business proposition – a new product (TLPS) that has never been available before. I would, therefore, be reluctant to put too much value on those past records.
- The idea, that nobody would pay for GSAT product is a key theme for Kerrisdale. They believe that WIFI is free in the US and therefore why would anybody pay for WIFI on TLPS. I counted at least 20 times they said this during the presentation. My experience is that there is nothing free in life. I do not know anybody, who would have a free WIFI. You always pay, directly or indirectly.
- They claim TLPS 2.4 GHz is an obsolete technology due to arrival of 5 GHz technology. The management argues that 5 GHz is a poor substitute for 2.4 GHz because it falls off faster and is more easily obstructed, making it more expensive than 2.4 GHz to cover a given area. The same view is shared by analysts covering the stock. SA discourages contributors to use strong judgments in the articles. I can, therefore, only state, that this is a good example of „inaccurate information” Kerrisdale is trying to present.
- They also claim TLPS network would have a zero value because it would be too costly to build. Kerrisdale put up a back of the envelope calculation, which comes to 3.5 trillion USD. A subsequent analyst report by Odeon Capital puts the construction costs at a small fraction of this. As an example Odean provides a calculation that it would costs only USD 50 mln to set up the system in the whole New York.
The Kerrisdale presentation was best summarized by Dan Wise from Credit Suisse, who wrote in his report: “We believe Kerrisdale’s short thesis to essentially be a collection of half-truths, apples-to-oranges examples and red herrings”.
Stock promotion vs. stock manipulation
Kerrisdale is asserting that GSAT valuation is a result of stock promotion – they call it a bubble that they want to burst and make money on this. That would be ok, but I am not sure if the way they went for it is legal. The way Kerrisdale marketed the „leaked story” looked like to me as a share manipulation. SEC is getting sensitive about such issues. The Securities and Exchange Commission’s thesis in the Herbalife insider-trading case was precisely that: That Bill Ackman’s plans to announce his short constituted material nonpublic information, even though he had no nonpublic information about Herbalife. The SEC calls it market-moving information. Market moving information must be handled with care. I am not sure, if the Kerrisdale actions met such standard. I am sure SEC will be looking at this. I did file a motion to SEC to do so, and I am sure many others did too.
Another interesting fact is the timing of Kerrisdale attack. Jay Monroe is the controlling shareholder and has been buying GSAT share during 2014. As mentioned before Kerrisdale timed the announcement to happen during the blackout period, when Monroe is prevented from buying the shares. It just shows how Kerrisdale is trying hard to achieve its mission. On the call Jay Monroe already indicated, that he would be buying more shares if they stay in the current level after the blackout expires.
There will be several catalysts that should help to lift up the GSAT share price:
- Insider purchases – Jay Monroe indicated on the call that he might buy more shares when the blackout period expires on 13 November. He has been buying GSAT shares during 2014 at higher prices. This should help the stock
- FCC ruling on TMPS – GSAT claims that the ruling is eminent, and they expect this ruling by the end of the year. Again this should be helpful for GSAT share price.
- Partner announcement – GSAT has stated that it is in discussions with several potential partners on the development of TMPS. After the FCC ruling on TMPS announcement of a partnership could be expected.
After listening to Kerrisdale and management webcasts and reading subsequent analyst’s reports, I believe that Kerrisdale short theses fail on common sense grounds. I am sure its actions will be subject of SEC review as Pershing´s actions on Herbalife were. GSAT shares are 50% down since the attack begun two weeks ago. I expect rerating plus further upside after the catalysts materialize. Pity we can not short Kerrisdale.
The 2,483.5-2,495 MHz AWS-5 portion of Globalstar’s TLPS/AWS-5 proposal (International Bureau (IB) Docket 13-213) is not exclusive to Globalstar; it is shared with 2,483.5-2,500 MHz grandfathered co-channel TV Broadcast Auxiliary Services (BAS) stations. These TV BAS Channel A10 stations are co-primary, not secondary, to Globalstar’s MSS allotment, and there is no sunset date on those grandfather rights. Most of the grandfathered A10 stations are mobile TV Pickup licenses, which authorize an unlimited number of transmitters by each licensee; that is, multiple electronic news gathering (ENG) platforms, including airborne mobile in the bigger markets. There are grandfathered A10 TV Pickup stations in most of the large metros, including Boston, Chicago, LA, Philadelphia, Phoenix, Sacramento, San Francisco, and others. Between co-primary users, the newcomer user is obligated to protect the incumbent (earlier in time) user. TV BAS sharing with MSS wasn’t a problem for the original space-to-Earth allotment, but is a problem for terrestrial use. And, just to make things interesting, the 2,473-2,483.5 MHz Terrestrial Low Power Service (TLPS) portion of the Globalstar proposal is a secondary, unlicensed, unprotected Part 15 low power use, which is co-channel with TV BAS Channel A9 at 2,467-2,483.5 MHz. Since A9 is a licensed, Part 74 service, per Section 15.5(b) of the FCC rules 2.4 GHz S-band WiFi must accept any interference and must not cause interference to TV BAS operations. There are also some mobile Part 101 licensees at 2.4 GHz, used by public safety. Broadcasters and police/sheriff departments frequency coordinate their use of this shared channel.