Iridium's fall... finally?

Despite the presence of another potential savior, Iridium's prolonged death rattle may have finally sounded at the end last week after Castle Harlan withdrew its $50 million offer to purchase the assets of the satellite-based mobile voice provider.

Iridium, which launched its low-earth-orbiting constellation in 1998, filed for Chapter 11 bankruptcy protection in August 1999 after billable minutes fell below expectations.

Since then, the company has gone through a series of court actions and last-minute financings to keep its satellites in orbit.

On June 7, the U.S. Bankruptcy Court approved a 45-day period for Castle Harlan to study the viability of Iridium's business plan. However, after conducting its due diligence, Castle Harlan determined that Iridium's assets did not warrant the $50 million offer.

"[Our] due diligence and marketing studies were unable to confirm that Iridium would generate even low levels of revenue with a high degree of certainty," according to a company statement.

Meanwhile, Motorola - Iridium's primary backer and the operator of the company's satellites - received court permission to de-orbit the constellation into the earth's atmosphere, where they would disintegrate upon re-entry.

After Castle Harlan removed its bid, Iridium withdrew its motion to prevent the de-orbiting, a move some analysts interpret as an act of resignation.

"I would think that Iridium is saying [that the constellation's destruction] is going to be the likely outcome," said Robert Peck, a satellite communications analyst with Lehman Brothers.

Potential buyers of Iridium's assets still exist, however. In May, IR Acquisition Group made a $61 million offer. But it seems Motorola is not seriously considering any offers.

"We have been in discussion with numerous parties for several months.... In spite of these discussions, nothing has come to fruition," said a Motorola spokesman, adding that the company is putting together a timetable for de-orbiting the satellites.

These offers might be getting rejected because their structure might not be profitable for Motorola, Peck said. In addition, the company might be turning down offers it thinks will be rejected by the bankruptcy judge, who makes decisions based not only on the amount of money offered but on the bidder's plans for the assets, he said.

Overall, the Iridium saga has had a negative impact on the entire satellite communications field. Combine the situation with that of satellite player ICO, which declared bankruptcy but was rescued by Craig McCaw and his affiliated companies, and investors have been downright skittish about satellites for several months.

The shares of the remaining major publicly held satellite company, Globalstar, have fluctuated between $7 and $9 since the beginning of July.

Iridium's problem, though, was not necessarily its technology but its target market of international business travelers, Peck said. After watching Iridium's rather public floundering, other companies have made adjustments. "Globalstar shifted to vertical market guys. Iridium should have covered vertical markets such as oil exploration and mining, areas outside of cities where building an infrastructure is not economical," he said.

Despite fears from some investors, satellite-based voice still has some powerful backers. Globalstar is owned by Loral Space & Communications, with significant investments from Qualcomm and Vodafone AirTouch (see box).

In addition, ICO-Teledesic Global, a holding company for McCaw satellite assets, has raised $1.5 billion of funding led by - among others - Microsoft's Bill Gates and private equity investor firm Clayton, Dubilier & Rice.

Whether such backers will make satellite communications successful in a crowded wireless market remains to be seen.

"Wireless satellite communications could potentially be successful, especially in certain parts of the world, but the focus and advancement of PCS and cellular makes it a tough haul," said Knox Bricken, a wireless industry analyst with The Yankee Group.