Those were the days – wonderful days. Days when Gilat Satellite Networks (Nasdaq: GILTF) raised inconceivable sums in share and bond issues. Gilat Satellite raised $730 million in the boom, and the share climbed to a peak of $180, reflecting a company value of $4 billion. The company signed agreements with Microsoft (Nasdaq: MSFT) and EchoStar Communications (Nasdaq: DISH) to invest in StarBand, its satellite Internet venture, and was even close to a share issue for it. Afterwards, however, things went straight downhill. See where Gilat Satellite is now – a share price below $2, reflecting a shrunken $40 million company value. The company owes $150 million to the banks and $350 million to bondholders. Th ebonds are due for redemption in 2005, and the company has only $90 million in cash left.
Gilat Satellite, fighting for its life, is having a hard time getting back on track. Its first quarter results were disappointing, and analysts continue to question its viability. Achieving a positive cash flow is necessary for the company’s survival, but it is not enough; it must also solve the problem of its debt structure – mostly its huge debt to its bondholders. While the bonds are due to be redeemed only in March 2005, Gilat Satellite can rely neither on a recovery powerful enough to enable it to pay off the bonds, nor on the share reaching the $186.18 conversion price, which currently looks totally unrealistic.
Gilat Satellite is fully aware of the urgency of finding a solution. When the company’s first quarter report was published last week, CEO Yoel Gat said, “Although the bonds are scheduled for redemption in 2005, we want to solve the problem as soon as possible this year.” CFO and VP finance and administration Yoav Leibovitch told “Globes” this week, “In the near future, Gilat Satellite will try to find a solution for repayment of the bonds with the help of experts in the field – people who have dealt with bond arangements and who have gone through the recent crises in this field. I hope it will happen soon and that the proposal is attractive enough to gain the consent of as many bondholders as possible.
”We obviously won’t insult or harm anyone. Our situation is distressing for all concerned, and we are devoting our best efforts to save our unique technological platform from the company’s predicament. We will soon decide how to reorganize our debt. The arrangement requires cooperation, and I hope we’ll get it.”
When Leibovitch says cooperation, he is of course referring to some kind of concession on the part of the bondholders. In short, there will be an interesting contest between Gilat Satellite management and the bondholders. Incidentally, one of the known bondholders is Mivtach Shamir Finance, owned by businessman Meir Shamir. Mivtach Shamir Finance paid NIS 51.7 million for 16.5 million bonds, whose market value is now half of that.
”I hear that Gilat Satellite management is taking appropriate action,” explains Oscar Gruss analyst Ehud Eisentein, who covers the company. “But at some stage, the dynamic and pace of events will be controlled by the main debtors, not the company. The debtors will have to decide whether to accept the new debt arrangement or have the company liquidated. This process involves too many parties and interests. It could get out of control and take too much time.”
NC CEO Yair Lapidot expects a poker game to develop between the three main players – Gilat Satellite management, the shareholders, and the bondholders. He comments, “The necessity for an arrangement will become clear with the passage of time. There is simply no alternative. Gilat Satellite has a big debt and makes an operating loss. In the normal course of business, the company can’t pay its debt. What’s left is a poker game against the bondholders, involving how many concessions, how many shares the bondholders get. It’s like arm wrestling.”
”Globes”: But the end result is obvious.
Lapidot: ”The bondholders have no interest in liquidating the company. In contrast to real estate or investment companies, where the creditors can appoint their own managers, a company like Gilat Satellite has almost no liquidation value, so it has to continue as a going concern.”
If that’s the case, then the company is under no real pressure.
”The assets available to the Gilat Satellite bondholders are the company’s business, its real estate, its patents, and its technology. Besides the bonds, its liabilities include its bank debts. The assets have value, but the bondholders aren’t in a strong position, because its obvious to everyone that the liquidation value of this kind of business is not great. You also have to add the probability, however low, that something big could happen with the company, perhaps with EchoStar, perhaps with other concerns, which would make the situation better for all concerned. In my opinion, the question is whether the arrangement with the bondholders gives them more than the market value. If the bonds are traded at $0.2585, the question is whether they will offer $0.20 or $0.30.”
In cash?
”Unless a knight in shining armor shows up to give Gilat Satellite financing, it has nothing to offer, because in the current situation, a substantial amount of cash can come only from outside. At the same time, the arrangement must have a cash aspect, because giving new bonds and shares in place of these bonds is a problem. Most bondholders don’t like arrangements without a down payment. The time factor must also be taken into account, because it can aggravate the bond situation and undermine the bargaining position. If the bonds are traded at only $0.17 in three months, and the bondholders are offered $0.25, the premium will seem much more reasonable. That means that it is better for the company if the arrangement takes place in a downturn, without a business breakthrough. In this case, any premium above the market value will seem reasonable, and the conversion ratio will be less important, because there will be no real upside on the horizon.”
From your description, management looks like a bunch of Machiavellian conspirators. For example, the cancellation of EchoStar’s investment in StarBand seems not so bad.
”I don’t wish to comment on what you just said. I will say that the final arrangement and its form are subject to power games between the parties, based on the market share and bond prices, which are affected by the company’s business. The more optimistic people are about the company’s business, the less willing they’ll be to make concessions on the bonds. They’ll want more shares as compensation for their losses on the bonds. From the company’s point of view, the worse its business situation seems, the easier it will be to push the bondholders into an arrangement.”
Where does management’s interest lie in this affair?
”If payment for the bonds is in shares, the bondholders will become the controlling shareholders, and I’m not sure that’s what management wants. Keep in mind that the relationship between the bondholders and the shareholders is a zero sum game, in which preference for one side is at the expense of the other.”
What is the source of the shareholders’ pressure to improve their situation?
”Ostensibly, the shareholders have no real case. The question is whether the company is more concerned about the shareholders than the bondholders. Notice should be taken of the managers’ holdings. Managers have shares and options in the company, but probably not bonds. If that’s the case, it’s obvious they have an incentive to be diluted as little as possible. The board of directors represents the shareholders, of course, and by definition helps them, and management is not exactly impartial, either.”
Yoav Leibovitch, do you feel you’ve managed to calm your creditors down? Your creditors in Israel seem very angry.
Leibovitch: ”Up until now, we’ve met all our bond payments. I know the world is full of nervous creditors – that’s natural and understandable. We’ll do the little we can.
In recent months, Gilat Satellite has been holding talks with its major bondholders, both institutional and private. The talks were aimed at soothing the bondholders, who could obstruct the company’s future operations. Gilat Satellite is trying to reassure the creditors that although the company is having a hard time, “In the long run,” as Gat puts it, “We anticipate a substantial recovery.” The message Gilat Satellite management is sending to its creditors is that the company will finish 2002 with a substantial positive cash flow.
One of the small bondholders, who wasn’t invited to those talks, sounds extremely upset: “They didn’t talk to me directly, but I hear the rumors, and they don’t sound good to me. We’ve been investing in bonds for years, and I’m familiar with the industry. I won’t go like a lamb to the slaughter. I prefer going to liquidation to getting all sorts of demeaning offers that will give us $0.30 for every dollar we loaned them. I’m talking about the cash component, to which must be added the rescheduling of the debt or its conversion into shares. Anyone considering an arrangement has to include a significant cash component; let no one think we’ll do without that.”
The impression is that you have no way to pressure the company, because it’s not worthwhile liquidating it.
”They’d better not threaten to knock down the house with us inside. According to my calculations, we can get a reasonable amount from liquidation. Let’s add up some figures: $90 million in cash, $40-50 million in real estate, $50-60 million for business, and another $60 million for the subsidiaries. What does it add up to? $240-260 million, from which you have to subtract the $150 million debt to the banks. That’s not the end of it, either, because we’ll fight to the end and sue the directors with fat insurance policies. I estimate we could get $150 million out of liquidation.”
Another private bondholder tells a different story. “What is he angry about? He should be angry at himself, not Gilat Satellite. He took a risky decision when he bought their bonds. From my talks with management, I gather they plan to go on paying the interest, and reach an arrangement for converting the principal.”
What will the arrangement consist of?
”They’ll pay part of the principal in cash and convert the rest into shares. The problem is that the share price is so low ($1.74, M.B). If they give a $2 conversion price, the bondholders will become the controlling shareholders, and they don’t want that to happen. On the other hand, if they’d only solve the bond problem, I’ve no doubt the company value would jump to $200 million, because the company still has sales. In my estimation, based on what management says, they will already have a positive cash flow in the tens of millions of dollars this year. In my opinion, they’ll want to set the conversion price at $8. In the end, it's a matter of logic. It's not a casino."
Published by Globes [online] - www.globes.co.il - on May 23, 2002