IRRIDIUM LLCStrategic Financial Management Submitted to: Submitted by: Dr. Sudershan Kuntluru Group 2 Nishant Dey Purkayastha (PGP/18/153) Amritanshu Roy (PGP/18/180) Angara Saxena (PGP/18/181) Sulekh Jain (PGP/18/224) Aniruddha Ghosh (PGP/18/284) how much was Iridium worth on a per share basis at the end of 1998 according to the projections in Exhibit 5? What are . Assuming the market was rational at the time (i. PGP/18/153 PGP/18/180 PGP/18/181 PGP/18/224 PGP/18/284 Name Nishant Dey Purkayastha Amritanshu Roy Angara Saxena Sulekh Jain Aniruddha Ghosh Contribution % 20% 20% 20% 20% 20% 1. market prices reflect fundamental values).Contribution of each Member Roll no.e. 212.217.69% Terminal Value 2007 Present Value of TV NPV value of Iridium's Equity Firm Value NPV Debt $28.26 Iridium’s first foray into the public markets occurred in June 1997.58 (I.28*7.1765 Million Iridium’s Worth Per Share Basis= $90.0 2 $15.09 +1.09% Expected Asset Return (Ra): Risk Free Rate + Asset Beta*Risk Premium Expected Asset Return (Ra): 5. a Bermuda corporation sold 12 million shares at $20.00 a piece—these shares represented 8.247.50 = 14. After Debt NPV/ Total Shares outstanding) .50.7 7 $8.5% of Iridium’s total outstanding shares Total Outstanding Shares=141. Risk Premium: 7.5%. (IWCL).788.e.Iridium World Communications Ltd.).2 7 $2.the important determinants of value? How confident are you in your answer? (Please assume the market risk premium equals 7.05 $12. Risk Free Rate: 5.035. 7% 16.787.237.883.656.2 $24. 6 $15.288.5% 10.468.2 $23.6 12.301. Why is Iridium potentially worth so much? Enterprise Value Terminal Perpetuity Growth Rate Disco unt Rate 0.170.5% .0% 2.633.5% 2.7% $22.5% $25.302. 6 $8.028. 0 $9.5% $9. 8 $12. 0 $13. 1 4. Conduct sensitivity analysis on the valuation.414.131.643.782. 9 $17. 0 $17.540.5% $29.275.026.8 4.649.040. 8 $12.0% 2.054.880. 0 $19.277.058. 6 $7.348.5% $20.7% 18.3 Value Per Share Terminal Perpetuity Growth Rate Disco unt Rate 0. 8 $23.029.549.715.5 $7.1 $7.5% 3. 6 Equity Value Terminal Perpetuity Growth Rate Disco unt Rate 10.273.417.090. 9 $10.745. 9 $10.992.5 14.535.7% $9.476.788.7% $11.663. 2 $12.5% $27. 2 $19. 8 $11. 2 $21.7% 12.337.1 $7.7% 0.Determinants of the Value Interest Rate Cost of Equity Capital Cash Flows 2.4 18.104.22.168% $32.7% $14. 3 $11. 7 $17. 8 $16.5 18. 4 $26.995.7% $17. 8 $15.035. 0 $9.7 3. 5 $10.3 3.811. 9 $19.7% 14.990. 6 $14. 1 $15.167.3 $11.0% 2.395.910. 3 $13.5% $30. 4 $9.896. 6 $20.6 16.4 $15.3 2.8 $9.5% 4.723.409. 7% 14.93 $106.64 $216.02 $93. It was assumed that once the project is complete. Bad Strategy Marketing and Sales mistakes: Size too big and phones not available in stores when advertising campaign was run Overpriced phones: $ 3. or bad luck? The reasons for failure can be attributed to both bad strategy and bad execution.47 $49. The market is factoring in all this positive news that is being reflected in the stock price.7% $165.13 $59.3% from 2003-04. 3.37 $109. subscribers and revenues of $8 – 20 bill.50 per call Mixed predictions regarding the mobile satellite market Leslie Taylor Associates predicted a user base of 7 mill.64 $79. by 2003 Forrester Research predicted that the global satellite market would be as much as $36 bill.62 $83.000 Prices too high: $3.7% 18.7% 12. bad execution.35 $74.66 $64.7% 16. Analyst projections are also very upbeat about Iridium and revenue are projected to grow at 100% or more from 1999-2000 and it saturates only after 2004. would resemble a utility company with high margins and steady cash flows.63 $56. Bad Execution .00 . by 2005.57 As per a report by McKinsey (Exhibit 2). Very ambitious project Iridium had signed 256 operating agreements with local providers in over 100 countries by July 1999. the MSS market is expected to grow at a CAGR of 60.05 $120.$146.78 10. There was no proper planning for the entire project and no contingency plan either.$7.58 $69.07 $191.54 $135.80 $125.33 $147. The company still had to negotiate agreements with another 140 countries and territories Project Financing Iridium LLC was a spin-off from Motorola.63 $90.76 $54.03 $52. What caused Iridium to fail: was it a bad strategy.27 $70.90 $172.22 $99. Erroneous target estimation in terms subscribers and thus revenues as well.000 as of March 31 [Expected: 27. of cash revenues] The Brick Size Phone (Battery Recharging Issue) Advertising: Spent $180 mill. It failed to answer over 1 mill.000 subscribers. Iridium major debt finance was short term debt with the maturity with in few years Low marketing campaign-Iridium fails to launch proper marketing campaign and loses its major share in the market. convertible debt and high yield debt. 10. Although Pecking order theory and Signaling theory support preference of debt over equity but do not explain the high D/V ratio. This portfolio matches the risk profile then. brought in more equity. campaign With regard to Iridium’s financial strategy. 52. got bank loans: agency motivations emerge. or issue capital in the wrong sequence? Examine its target capital structure of debt-to-total book capitalization ratio of 60%? Target D/V ratio of 60%: Cannot be explained by trade off theory since tax rate is 15% only. 4.294 total service subscribers and cumulative cash revenues of $195. did it have the wrong target capital structure.000 orders for satellite phones because the manufacturer could not ramp up production fast enough. issue the wrong kinds of capital. greenfield projects do you draw from this case study? Financial Viability Parameters like IRR. Started with equity during the riskiest stage (research) since debt would be mispriced due to asymmetric information and risk. it was unable to fill 15.188 satellite subscribers. payback period should be used to determine financial viability Such projects can be evaluated as a Real Option . What lessons regarding the financing of large. In development. Financing Sequencing 5. According to one source Iridium could have sold shares worth 1 billion US dollars in comparison to 240 Million US dollars only. sensitivity analysis.000 total service subscribers and $4 mill. For commercial launch. Iridium announced that it had only 7. sales inquires due to internal confusion and experienced logistical problems trying to distribute phones In March 1999. over-estimation of the practicality of the device and usage. Focus group Better understanding of the competition. Short maturity dates on loans did not provide sufficient time to gather enough subscriber revenues to service the debt Provide stock options to managers to align personal interests with the project’s success Be conservative with estimations and projections. Limited roll-out. contingency plans Stakeholders and departments need to be in sync with the project objectives . More time in analyzing Target Market (wrong target market. study gap in the market. Optimistic vs Pessimistic predictions. especially for untested markets Commercial Viability Test market. of Defense) Thorough Market Analysis. should have targeted Dept.