Kerrisdale Short Thesis On Globalstar Questionable by Jan Martínek
On Wednesday 1/10 a rumor was circulated that Kerrisdale, a prominent short fund, would host a presentation on its Globalstar, Inc. (NYSEMKT:GSAT) short position on Monday 6/10. Based on the rumor, Globalstar 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 October 9th. The presentation came in the midst of the recent global equity sell off and failed to lift the price.
Introduction to Globalstar
Globalstar, Inc. (NYSEMKT:GSAT) is the fourth largest global satellite phone company. It has invested over $1 bln into its global satellite network. Prior to the Kerrisdale attack, the firm had a market value of $5 bln and debt of $700 mln USD. Its annual EBIT is about $20 mln.
Since 2004, Globalstar is controlled by Thermo Capital Partners, who has around 70% stake in Globalstar. 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 come close to justifying the current Globalstar, Inc. (NYSEMKT: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 of the asset.
Globalstar, Inc. (NYSEMKT:GSAT) management and some 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 on the other hand, argues that TLPS is not an asset, and even if it were, that it would have a zero value. Their arguments can be simplified into four basic propositions:
- Nobody has ever made money in satellite communications and Globalstar, Inc. (NYSEMKT:GSAT) won’t either.
- Nobody would pay for a Globalstar product.
- The TLPS 2.4 GHz is an obsolete technology due to arrival of 5 GHz technology.
- The network that Globalstar 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 Globalstar 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 Globalstar, Inc. (NYSEMKT:GSAT) product is a key theme for Kerrisdale. They believe that WIFI is free in the U.S. 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 has 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 to use than 2.4 GHz to cover a given area. The same view is shared by many analysts covering the stock.
- They also claim TLPS network will have a zero value because it will 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, Odeon provides a calculation that it would costs only USD $50 mln to set up the system in New York.
The Kerrisdale presentation was 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 Globalstar, Inc. (NYSEMKT:GSAT) valuation is a result of stock promotion – they call it a bubble that they expec to burst. I believe the way Kerrisdale marketed the “leaked story” verged on share manipulation. I am sure SEC will be looking at this. I filed a motion with SEC 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 Globalstar shares during 2014. As mentioned before, Kerrisdale timed the announcement to happen during the blackout period when Monroe is prevented from buying the shares. This also highlights just how Kerrisdale is trying hard to achieve its mission. Jay Monroe already indicated on the call that he would be buying more shares if shares stay at the current level after the blackout expires.
There are also several catalysts that should help boost the Globalstar, Inc. (NYSEMKT:GSAT) share price:
- Insider purchases – Jay Monroe indicated on the call that he might buy more shares when the blackout period expires on November 13th. He has been buying Globalstar shares in 2014 at higher prices. This should help the stock price.
- FCC ruling on TMPS – Globalstar, Inc. (NYSEMKT:GSAT) claims that the ruling is imminent, and they expect this ruling by the end of the year. Again this should be helpful for GSAT share price.
- Partner announcement – Globalstar 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’s short thesis fails on common sense grounds. I also believe there will be an SEC review of Kerrisdale’s actions in this case. Globalstar, Inc. (NYSEMKT:GSAT) shares are 50% down since the attack begun two weeks ago. I expect analysts reratings plus further upside for GSAT after the catalysts materialize.