Iridium LLC

Group 7:
Gubbala Bhavana PGP10083
Sidhant Verma PGP10175
Abhilash R. Gaurkhede PGP10186
Kashish Baranwal PGP10210
Prateek Sarin PGP09219
Iridium
• Motorola unveiled the plans for a $3.4 billion communications system
named Iridium.
• The name came from its proposed constellation of 77 satellites (later
reduced to 66 satellites) which resembled the 77 electrons orbiting the
element Iridium.
• In addition, the system would require 12 ground stations (gateways) located
around the world to link the satellites with ground lines.
• But to achieve a seamless system, Iridium had to obtain worldwide
spectrum rights and negotiate royalty agreements with local phone
companies. In fact, Iridium had signed 256 operating agreements with local
providers in over 100 countries by July 1999.
Iridium’s Operating and Financing
History
• Motorola created Iridium as a separate company
• Iridium was initially expected to cost $3.4 billion, generate revenues
of $5 billion, and have assets of $4 billion by 2002.
• According to the financing plan, Iridium would maintain an approx.
50% D/E ratio by raising $1.6 billion of equity followed by $1.8 billion
of debt
• By August 1993, commitments for $800 million from its strategic
partners had been obtained and the company hoped to raise another
$800 million from the strategic partners in 1995
Iridium’s Operating and Financing
History
• Second round of financing finished sooner than expected and Iridium
secured commitments for another $734 million of equity in
September 1994.
• Based on investor demand for the equity and general interest in the
project, Iridium’s bankers thought it could raise 60% of the total cost
in debt.
• The theory behind this target leverage ratio was that Iridium, once
complete, would resemble a utility with high margins and steady cash
flows.
System Development & Financing
• Motorola signed a Terrestrial Network Development Contract in 1995,
under which it signed 12 gateway contracts in 1995.
• Before it could create and launch the first satellites, it required
additional financing
• It sold $238 million of ten-year bonds with warrants in April 1996 which
would give 14.5% interest for first 5 years and cash interest for the rest
• But this was still not adequate so Iridium signed a $750 million bank
facility in August 1996.
• As the loan had been guaranteed by Motorola, a AA rated company,
banks rated this loan at a prime rate
IPO Success & Debt Issue
• In 1997 Iridium issued 12 million shares (8.5% of total) at $20 each
through an initial public offering (IPO), issued three tranches of high-
yield debt totalling $1.1 billion, and signed a $1 billion secured bank
facility.
• The IPO’s success encouraged Iridium to issue $800 million of high-
yield debt in two tranches in July 1997.
• The Series A senior notes were priced to yield 13% and came with
warrants to purchase IWCL shares. The Series B senior notes required
a higher yield (14%) because they did not come with warrants.
IPO Success & Debt Issue
• Both were semi-annual, cash-pay bonds with 8-year maturity (2005)
and sold at an effective yield of almost 700bps over Aaa rated bonds,
despite being rated B-
• In October 1997, the company launched Series C notes sold at par
with a coupon of 11.25%, a spread of 400bps over Aaa- rated bonds.
• Iridium issued a fourth series of senior notes ($350 million of Series D
notes) in May 1998 but with a lower interest rate of 10.88%.
Further Debt Issue
• Iridium also established a two-year senior secured line of credit with a
syndicate of banks in December 1997.
• The line consisted of a $350 million term loan and a $400 million
revolving line of credit, with an additional $250 million available on
the revolving line in September 1998, if Iridium achieved certain
operating milestones.
• The line was secured by a $243 million capital call on the strategic
partners. It had a variable interest rate equal to prime plus 2.75%.
Both lines matured in September 1998 but could be extended until
June 30, 1999
Problems at Iridium
• Iridium announced the new service in July 1998. It conducted a $140
million advertising campaign in 16 languages across 45 countries with
the slogan “Freedom to Communicate. Anytime, Anywhere.”
• However, due to internal confusion the company it failed to answer
over one million sales inquiries during its advertising campaign. There
were further logistical problems trying to distribute phones.
• Its phones started out costing $3,000, were the size of a brick, and
didn’t work as promised. Prices ranged from $3.00 to $7.50 a call,
which were extremely expensive.
Problems at Iridium
• These problems forced Iridium to delay the start of commercial
service by two months.
• As it started to become clear that Iridium was not attracting as many
customers as expected, concerned bankers forced Iridium to
negotiate new bank facilities in December 1998. The renegotiation
brought in new covenants on the loans
• The company continued to stumble in terms of conserving cash flow,
ramping up production, and keeping up with market demands
• It tried to temporarily solve the issue through a second equity offering
raising $240 million
Rectification Steps
• The new management fired 15% of the workforce in June 1999, and
revamped the company’s marketing strategy.
• They cut the usage charge from $7.00/min to $1.89/min, and slashed
the advertising budget to $12 million.
• However Iridium missed the scheduled interest payments on its notes
on July 15.
• Iridium had still not attracted enough customers or generated
sufficient revenue to meet the covenants on its secured credit facility,
despite banks granting 5 months extension.
Default and Bankruptcy
• By August, Iridium had still not attracted enough customers or
generated sufficient revenue to meet the covenants on its secured
credit facility.
• As a result, it was in technical default when the August 11 deadline
arrived.
• Two days later, a group representing the public bondholders filed an
involuntary bankruptcy petition based on cross-default provisions in
the notes.
• Later that same day, Iridium filed a voluntary Chapter 11 bankruptcy
petition to protect itself from the creditors.
How much was Iridium worth on a per share basis at the end of 1998 according to
the projections in Exhibit 5? What are the important determinants of value? How
confident are you in your answer? (Assume the market risk premium of 7.5%)
What caused Iridium to fail: was it a bad strategy, bad execution, or
bad luck?

Bad Strategy
• The company made many marketing and males mistakes
• Phones were overpriced at $3,000
• Calling prices were very expensive, ranging from $3.00 - $7.50 per call
• Analyst predictions regarding the mobile satellite market were too varying
• Leslie Taylor Associates predicted a user base of 7 mill. subscribers and revenues of $8 –
20 bill. by 2003
• Forrester Research predicted that the global satellite market would be as much as $36
bill. by 2005.
• Iridium had signed 256 operating agreements with local providers in over 100
countries by July 1999 but still had to negotiate agreements with another 140
countries and territories.
Continued…
• Iridium LLC was a spin-off from Motorola for which project financing
was undertaken
• It was assumed that once the project was completed, the company
would resemble a utility company with high margins and steady cash
flows
• There was a severe lack of production & financing planning with no
contingency plan
What caused Iridium to fail: was it a bad strategy, bad execution, or
bad luck?

Bad Execution
• It failed to answer over 1 million sales inquires due to internal confusion and
experienced logistical problems trying to distribute phones
• In March 1999, it was unable to fill 15,000 orders for satellite phones because
the manufacturer could not ramp up production fast enough.
• Iridium announced that it had only 26% satellite subscribers, 19.8% total service
subscribers, and cumulative cash revenues 4.875% of the expected milestones
as of March 31 [Expected: 27,000 subscribers, 52,000 total service subscribers
and $4 mill. of cash revenues]
• Hand-sets were brick shaped and not aesthetically pleasing
• Despite the huge cash crunch, they spent $140 million on a marketing campaign
 With regard to Iridium’s financial strategy, did it have the wrong
target capital structure, issue the wrong kinds of capital, or issue
capital in wrong sequence?

• Initially, Iridium financed with equity during its riskiest stage (research). This
was because debt would be mispriced due to asymmetric information and
risk.
• During the development stage, it brought in more equity, convertible debt
and high yield debt.
• Till here the type of issue capital and sequencing was appropriate
• However for commercial launch, the company took bank loans which
resulted in restrictive conditions
• Iridium’s major debt finance was short term debt maturing within a few
years. The company had long term recurring costs along with high cash flow
requirements, making short term debt inappropriate for their needs
 Why did Motorola finance Iridium with project debt instead of
corporate debt?

• Motorola would not be directly liable/responsible for the project’s

debt
• Creditors would only have access to Iridium’s cash flows, thus safe
guarding Motorola’s books
• Risk concentration: corporate debt could not be used because of its
narrow scope and single source of revenue
• The company was viewed as being a potential cash cow, thus
Motorola wanted to retain control and decision making within the
company
 What lessons regarding the financing of large, greenfield projects
do you draw from this case?

Financial Viability
• Parameters like IRR, sensitivity analysis, payback period should be used to determine financial
viability. Only then should a project be considered.
• Short maturity dates on loans were not appropriate for as they did not provide sufficient time
to gather enough subscriber revenues to service the debt
• Adopt conservatism with estimations and projections, especially for untested markets
Commercial Viability
• Conduct market tests through Limited roll-out or Focus groups
• Conduct better understanding of the competition
• Spend more time identifying and narrowing down the Target Market (Iridium should have
targeted Dept. of Defense from beginning)
• Stakeholders and departments need to be in sync with the project objectives
• Always have a contingency plan
Thank You