Sahm Adrangi, chief investment officer of Kerrisdale Capital Management in New York, gained notoriety in October when he announced — in a style intentionally imitating William Ackman — that he was shorting the stock of Globalstar. A major provider of mobile satellite services, the company is seeking a viable market for unused spectrum that it says could cover the world with highly reliable Wi-Fi. A number of hedge fund managers have bet that Covington, Louisiana–based Globalstar can turn its fortunes around. But the showdown between this faction and Adrangi won’t begin until the Federal Communications Commission grants the company a license to use its so-called terrestrial low power service (TLPS) spectrum for an enhanced form of Wi-Fi. Globalstar CEO James (Jay) Monroe III wants to provide something that doesn’t exist yet: a Wi-Fi service in public areas that guarantees consumers speed, reliability and security in return for a fee. Industry watchers are fairly sure the FCC will grant the license late this year or early in 2015. Not that Adrangi, who manages about $300 million in his long-short equity fund, thinks FCC approval will make a difference in the value.
“Globalstar trades at a high market cap relative to revenue,” Adrangi says. “Typically, companies that are trading that way and not growing their revenue very fast have some form of proposed technology.” But he believes the breakthrough technology of $3.6 billion-market-cap Globalstar “doesn’t make sense.”
Larger hedge funds that owned Globalstar stock as of the end of the second quarter, according to SEC filings, included Caspian Capital Partners, Litespeed Management, Israel Englander’s Millennium Management, James Dinan’s York Capital Management — all in New York — and Andrew Redleaf’s Minneapolis-based Whitebox Advisors.
“We’ve done our due diligence, and we think there’s value,” says David Tawil, co-founder of $75 million Maglan Capital in New York, who has been investing in Globalstar for about a year. Tawil accuses Adrangi of spouting “a lot of half-truths” and destroying value.
Adrangi is young –33 – and sees something of a role model in Ackman, CEO of Pershing Square Capital Management in New York. “I think he’s a trailblazer in many ways,” he says of Ackman. “We copied a number of his tactics in our work on Globalstar.”
For his October 6 presentation to investors about his reasons for shorting Globalstar, Adrangi rented space at the AXA Equitable Center in midtown Manhattan, the same auditorium that Ackman used in July for a presentation that he billed as a “deathblow” to Herbalife. Adrangi actually has long positions in Herbalife, but he has copied Ackman’s www.factsaboutherbalife.com website with one called www.factsaboutglobalstar.com, which has a nearly identical design except that the background color is orange instead of green.
And in Tawil, Adrangi has something of a Carl Icahn-like foil to his budding Ackman, except that the two of them are playing with mere millions of dollars instead of billions.
Monroe himself is also blaming Adrangi for the lackluster share price. The stock peaked in July at $4.46, then dropped from the $3.00 to $4.00 range a few days before Adrangi’s October presentation — a drop that may have been based on news that he was planning to announce his shorts. The price slumped to $1.71 a week after Adrangi’s presentation, then began a gradual ascent.
Adrangi, to be sure, timed his presentation to a blackout period in which Globalstar’s senior officers were not allowed to buy shares pending the release of the company’s third quarter financial statement. The blackout period ended on November 10, Monroe bought 230,000 shares in three days, and the stock picked up by a few cents a share.
The stock is now trading at around $2.68, slightly up on news of this week’s FCC spectrum auction in which the aggregate value of spectrum licenses rose from $8.9 billion on Monday to $16.4 billion on Tuesday. A research report from J.P. Morgan says the rapid rise in prices will be bad for telecom carriers that are spending more than expected, particularly AT&T and Verizon, but positive for independent spectrum owners like Dish Network and Globalstar.
Jim Cramer, host of “Mad Money” on CNBC, recommended the stock in July and now says “I wish I’d never heard of it.” His biggest concern is about the company’s debt load, but this week Cramer had Monroe on his show and pointed out Globalstar has become a polarizing stock.
“It’s polarizing because of Kerrisdale,” said Monroe.
The hedge fund managers invested in Globalstar are indeed waiting for a breakthrough, however, presumably in the form of FCC approval followed by the sale of spectrum rights. Monroe bought the company in bankruptcy in 2003. Since then Globalstar has continued to suffer net losses. Losses from operations were $87.4 million in 2013 and $18.1 million in Q3 2014, with total operating expenses of $41.50 running well above the revenue of $23.4 million.
Monroe has backed operations with more than $600 million of his own money; he tried to get Warren Buffett to invest, but Buffett declined, saying he preferred to put his money into businesses he understood. The stock had been trading over-the-counter on the OTCQB until the New York Stock Exchange approved trading in April.
Adrangi’s bearishness on Globalstar’s future is based on a theory that enhanced Wi-Fi isn’t necessary. When a public Wi-Fi network doesn’t work well, it’s often due to old routers that aren’t prepared for present-day traffic, he says. Adrangi has experienced slow, unreliable Wi-Fi himself, he says, right at his neighborhood Whole Foods Market, which hasn’t upgraded its routers in five or six years. But he doesn’t believe people will agree to pay for better Wi-Fi in public hot spots.
“Globalstar’s view is that people should buy into this so that the company doesn’t have to file for bankruptcy,” says Adrangi. “They’ve created an alternative reality.”
In his view, the plan to license its spectrum for Wi-Fi is an act of desperation. “What do you do if you have an insolvent satellite phone company and some spectrum and you can tell the market you’re going to do something with this spectrum?” says Adrangi. “I think they’ve acted rationally to try to rescue their equity value but that doesn’t mean the market has to buy into their fantasy.”
The outcome is somewhat binary, depending on the FCC decision and a view of public Wi-Fi that has yet to be tested in the marketplace. Jason Bernstein, an analyst with boutique brokerage firm Odeon Capital Group in New York, has been bullish on the prospects for TLPS spectrum.
“There are benefits to having a licensed Wi-Fi channel,” says Bernstein. “It will function well in areas where congestion affects speed and service, and it will be a safeguard against cyberhacking.” He believes, contrary to Adrangi’s pronouncement that the company is worth nothing, that Globalstar’s spectrum could be worth $4.5 billion and the stock about $5 a share.
