Weak U.S. Dollar Against Euro Creates Problems for Globalstar

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LONDONMobile satellite services provider Globalstar, already facing an extended decline in revenue because of the degradation of its two-way voice service following a satellite power-amplifier problem, is confronting sharply higher bills for its second-generation constellation because of the decline of the U.S. dollar relative to the euro.

The constellation is being built by a European manufacturer, and the contract value is sensitive to exchange rates.

Milpitas, Calif.-based Globalstar on March 19 filed a registration with the U.S. Securities and Exchange Commission (SEC) for $700 million in new stock or bond offerings, with the timing and pricing to depend on market conditions. The funds will be used to help pay for Globalstar’s ongoing operating costs, and for the second-generation constellation, which the company said will cost $1.25 billion including launches.

But that $1.25 billion figure, which includes $210 million for the launch of the first 24 satellites on four Russian Soyuz rockets, will rise as the dollar falls.

The launch contract with the Arianespace consortium of Evry, France, was written in dollars, offering Globalstar protection on the exchange-rate front. But it, too, will end up costing more than the headline figure because of a vendor-financing feature for which Globalstar will pay Arianespace a fixed annual rate, and because the contract price is pegged to the cost of raw materials in Russia. Globalstar made initial payments of $10.5 million to Arianespace under the launch contract in 2007 and will owe $31.5 million this year and $112.9 million in 2009, when the launches are scheduled to begin.

Globalstar has an option with Arianespace to launch the remaining 24 second-generation satellites but has not yet exercised the option.

The company said in an SEC filing that for every 1 percent in the dollar’s decline against the euro, its contract with Thales Alenia Space for construction of the second-generation constellation increases in cost by about $7.4 million. By that measure, the contract is already costing an additional $50 million given the dollar’s performance since Jan. 1.

Globalstar signed the 48-satellite contract with ThalesAlenia Space in November 2006. The contract, when additions for a network control facility are added, is valued at 667.6 million euros ($1 billion).

Some 22 percent of the contract’s value was set at a fixed dollar-euro exchange rate of $1.294 per euro. For the remaining 78 percent, Globalstar is at the mercy of the dollar’s performance. The company did not identify any currency-hedging contracts that it had purchased.

The euro was trading at $1.47 Dec. 31, when Globalstar closed its 2007 accounts. Globalstar said in its SEC filing that it had paid ThalesAlenia Space 103.4 million euros in 2007 and would owe the manufacturer 157.6 million euros this year. Another 95.6 million euros will be owed in 2009, 92.3 million euros in 2010, with the remaining 227.7 million euros to be paid between 2010 and around 2015. 

Since Dec. 31, the dollar has further declined by 6.8 percent, to $1.57 to the euro as of March 19. If it stays at that level, Globalstar’s payments to ThalesAlenia Space will increase by $50.3 million, according to Globalstar’s calculation.

“Increases in the value of the euro compared to the U.S. dollar have effectively substantially increased the euro-denominated costs of procuring our second-generation satellite constellation,” Globalstar said in its SEC filing.