November 28, 2006, 3:13 pm


pre ipo analysis on the entire calendar week in and week out at:

WLDN - Willdan Group

WLDN, Willdan Group plans on offering 2.8 million shares at a range of $9-$11. 800k of the offering will be coming from selling insiders. Wedbush Morgan is the sole book-runner here. Wedbush Morgan has not led many offerings, although they co-managed the Baby Universe ipo and have placed small pieces of successful ipos such as crox/lend/ikan/ggxy/jmdt. Post-offering WLDN will have 6.7 million shares outstanding for a market cap of $67 million on a $10 pricing. Yes WLDN is a microcap ipo. Roughly 25% of ipo proceeds will be going to insiders as part of the conversion from an S Corporation, the remainder will be used for general corporate purposes.

Directors and executives will own approximately 25% of WLDN post-offering.

From the prospectus:

We are a leading provider of outsourced services to small and mid-sized public agencies in California and other western states.'

Well we've seen a number of Federal Defense outsourcing ipos this decade as well as a number of managed care Medicaid providers, why not a company that focuses on outsourcing at the county level. Actually the ipo WLDN most reminds me of in scope is the PRSC ipo, which came public in 2003 with a $92 million market cap. Today prsc totes a $320 million market cap. WLDN has a much different focus then PRSC, but each are small caps focusing on outsourced services at the state level and below.

WLDN's, outsourcing services focus on civil engineering, building & safety services, geotechnical engineering, financial consulting, economic forecasting, disaster preparedness and homeland security.

WLDN is primarily an engineering outsource firm, as 85% of contract revenues are engineering based. The focus of WLDN's engineering outsourcing operations are building out infrastructure, as well as the rehabilitation of aging structures, such as those related to aviation, bridges, dams, drinking water, energy (power), hazardous waste, navigable waterways, public parks/recreation, railroads, roads, schools, security, solid waste, transit, and wastewater.

The American Society of Civil Engineers(ASCE) estimates that 28 % of California's bridges are structurally deficient or functionally obsolete, and 71% of the state's major roads are in poor or mediocre condition. Additionally, the ASCE estimates that $17.5 billion will be needed over the next 20 years to meet the drinking water needs for the state. These are all part of WLDN's core business focus.

In 12/05 President Bush signed the Safe, Accountable, Flexible, Efficient Transportation Equity Act. The act was signed in response to growing concern over the condition of the nation's infrastructure.The act allocates more than $286 billion to infrastructure investment through 2009, a 40% increase over predecessor legislation. WLDN anticipates this act will filter down to greater city/county spending on infrastructure improvement.

WLDN, founded over 40 years ago has 20 offices throughout California(and other states) and a staff of just over 650. WLDN focuses on small to mid-size communities with populations of 10,000 - 300,000. The philosophy here is that since WLDN already has the infrastructure, they are able to utilize county dollars more efficiently as an outsource entity, then the smaller counties could by hiring staff, office, infrastructure etc. WLDN also focuses on these smaller counties as they feel they are underserved by the larger outsourcing agencies/companies.

WLDN provides services to approximately 60% of the 478 cities and over 60% of the 58 counties in California. 85% of revenues is derived from California municipalities.

WLDN is a direct play on local governments shifting to privatization in an attempt to accomplish more with finite resources. Factors driving this outsourcing/privatization trend include, 1) overall population growth without always a similar boost in county/city revenues; 2) sustained demand for services; 3) the creation of new municipalities, often in high growth suburban outlying areas; 4) Federal homeland security grants to local governments.


$2 a share in cash post-offering, negligible debt.

3 X's book value at $10.

Less then 1 X's 2006 expected revenues on a $10 pricing.

Revenues have grown steadily. $58 million in 2004 revenues grew 16% to $67 million in 2005. Through the first 9 months of 2006, WLDN is on track to grow revenues 16% to $80 million.

Expenses have been growing roughly at the same pace as revenues, eliminating any economies of scale. This is a thin margin business. Operating margins were 7% in 2004 and 2005 and are on track for 8% in 2006.

Net margins in 2005 were 4%-5%. Earnings per share were $0.45. On a pricing of $10, WLDN will be trading 22 X's trailing earnings.

For 2006 WLDN appears on track for net margins of 5%, thanks in part to a strong 3rd quarter. Earnings per share appear on track for $0.60-$0.65 fully taxed. On a pricing of $10, WLDN would be trading 16X's 2006 earnings.

Risk - the big risk here with the revenues concentrated in CA would be a severe economic downturn in the state. During the 1991-1992 economic downturn in California, WLDN experienced negative earnings and cash flow difficulties. Also outside of an economic downturn, budget cuts in CA would also negatively impact WLDN's revenues and profitability. On the other hand, a natural disaster in the state would most likely benefit companies such as WLDN as greater federal monies would flow into the effected CA municipalities.

WLDN has steadily grown revenues and should continue assuming A) the population of California continues to grow and B) the economy of California remains strong. Also much of California's infrastructure needs to be rebuilt and WLDN has worked with the majority of CA's municipalities. I would like to see a bit stronger growth here, as well as stronger operating margins. However both are right on par for the government outsourcing sector. Solid micro-cap ipo. These smaller offerings can filter good news to the bottom line fast and hard. PRSC ipo'd with similar multiples and has more then tripled market cap in 3 years. If WLDN can continue growth curve and gain a solid new contract win or two annually, the stock should perform well over time. Recommend on an in range pricing.

November 18, 2006, 4:24 pm


CEP - Constellation Energy Partners

CEP - Constellation Energy Partners plans on offering 5.2 million units at a range of $19-$21. Citibank and Lehman are lead managing the offering. Post-offering CEP will have 12 million units outstanding for a market of $240 on a pricing of $20. IPO proceeds(plus an additional $30 million in borrowings) will go to parent company Constellation Energy Group(CEG). Post-offering CEG will own 60% of CEP, essentially all non-public units. CEG will directly manage CEP's operations as well as control all the managing partnership units.

From the prospectus:

'We are a limited liability company that was formed by Constellation in February 2005 to acquire coalbed methane reserves and production. We are focused on the acquisition, development and exploitation of oil and natural gas properties, or E&P properties, as well as related midstream assets.'

Another limited partnership ipo, CEP's main business is natural gas exploration and production. CEP plans on buying a quarterly dividend of $0.4625 per unit quarterly, or $1.85 per unit per year. On a $20 pricing, CEP would be yielding a strong 9.25% annually.

Estimated proved reserves are 100% natural gas and located in the Robinson's Bend Field in Alabama's Black Warrior Basin. Proved reserves are 112.0 Bcf, 80% of which are classified as proved developed producing. Reserves have an estimated 25 year lifespan at current and anticipated production levels.

Robinson's Bend Field - The Black Warrior Basin is one of the oldest and most prolific coalbed methane basins in the country, with over 2,750 producing coalbed methane wells. These multi-seam vertical wells range from 500 to 3,700 feet deep, with coal seams averaging a total of 25 to 30 feet of thickness, per well.

CEP goal is to provide consistent cash flow and a growing annual yield to investors. To that end, CEP has hedged a large portion of anticipated future production. Currently CEP has hedged approximately 79% of expected production from October 2006 through December 2009. The policy going forward is to hedge 80% of up to five year expected production for each of their wells.

CEP will look to acquire complementary operations going forward as well as drilling low risk new wells on their Robinson's Bend field property.

CEG - The strength behind this offering is the back of CEG, Constellation Energy Group. CEG is a $12 billion market cap operation with $17 billion in 2005 revenues and $20 billion in assets. CEG operates in three energy segments, Merchant Energy, Regulated Electric, and Regulated Gas. Through these three segments CEG is engaged in numerous aspects of the energy industry, including oil and natural gas exploration and production, natural gas transportation, natural gas storage and physical and financial natural gas trading. CEP's stated goal is to increase yield over time, and CEG will be the driver here. Reading between the lines in the prospectus, it appears CEG will specifically acquire and develop potential E&P properties with an eye to shifting them over to CEP once they begin producing.

A 9.25% annual yielding MLP with the backing of a $12 billion dollar energy conglomerate is appealing. CEG will not allow CEG to sink -- They will most definitely look to shift yield baring assets to CEG in the future. It is a safe assumption to assume these assets will growth CEP's annual yield.


Debt is minimal at $22 million.

1 1/2 X's book value at $20.

CEP is a small operation with an anticipated $35 million in 2006 natural gas sales.

Ability to make quarterly distributions - While CEP does hedge 80% of production going out 5 years, there is still commodity price risk. If natural gas prices enter into a prolonged slump, CEP would have difficulty paying yield. This is a key factor that differentiates E&P unit offerings from midstream asset unit offerings. The midstream asset(pipelines/terminals/storage facilities) unit offerings for the most part make revenue off the flow of natural gas not the underlying price. While CEP is hedging 80% of production, the yield will still be subjected to natural gas price risk. Note that this can work both ways - if natural gas prices rise, yield could be higher.

2007 projections. CEP is projecting to easily have enough cash on hand to pay the initial dividend. However in making projections, CEP is assuming natural gas prices for full year 2007 of $8.35 higher then current prices. They have hedged at over $9MMBTU, which currently looks like a very nice hedge price for them. At $8.35 average price of natural gas for 2007, CEP would actually have cash on hand to distribute $2.25 per unit in 2007.

It would appear if natural gas stays in the $5-$7 range for 2007, CEP would easily be able to pay annual yield, thanks in large part to hedging 90% of production over $9MMBTU's. If natural gas prices rise to $8 or above for most of '07, I would expect a much stronger yield here then the anticipated for the full year '07.

Conclusion - I usually shy away from E&P unit offerings due to commodity prices directly effecting yield. Also E&P operations usually need to continually invest in new properties and wells as annual production depletes reserves. The latter does not mesh well with the MLP structure set up to turn over all cash on hand quarterly to unit holders. However I like this deal. The 9.25% initial annual yield is very strong here. Couple that yield with the strength behind CEP, Constellation Energy Group and this deal works. I believe CEG will develop properties for CEP going forward, taking much of the risk out of future CEP acquisitions. The risk here is of course a bear market in natural gas prices. If that occurs, CEP will have difficulty paying the yield and also difficulty hedging future production at a price strong enough to pay future yield. That is a real risk here and one reason why I suspect the initial yield is so strong at 9.25%.

Combination strong initial yield and parent company make this deal work in range and $1-$2 above.

November 11, 2006, 8:35 pm


Pre-ipo analysis and forum for subscribers at

KBW - KBW Inc.

KBW - KBW Inc.(Keefe, Bruyette Woods) plans to offer 7.5 million shares(assuming over-allotment is exercised) at a range of $19-$21. Insiders are selling 3.75 million shares in this offering. Keefe, Bruyette and Woods will be self-underwriting their own offering. Merril Lynch will joint lead managing the offering with 6 other houses co-managing. Post-offering KBW will 30.4 million shares outstanding for a market cap of $608 million on a $20 pricing. IPO proceeds will be used for general corporate purposes.

Directors and Executive Officers of KBW will own 23% of shares outstanding post-ipo, all employees as a whole 80%. Pre-ipo entire firm is employee/director owned with no single individual owning more 4.2% of outstanding shares.

From the prospectus:

'We are a leading full service investment bank specializing in the financial services industry. Since our founding in 1962, our commitment to this large and growing industry, our long-term relationships with clients and our recognized industry expertise have made us a trusted advisor to our corporate clients and a valuable resource for our institutional investor customers.'

We've seen a number of boutique investment banking ipos the past few years including Lazard, Greenhill, Evercore, Cowen and Weisel. They've broken down into two types: 1) The M&A(mergers & acquisitions) based group that has ridden the wave of consolidation the past few years, showing strong operating results and robust stock market appreciation. This includes Lazard, Greenhill, and Evercore. 2) The underwriting based group that has struggled to show revenue growth the previous 2-3 years, Cowen and Weisel.

Group one ipos have been 3 of the best performing ipos of the past few years, while group 2 has struggled.

The key to this deal is the following line from the prospectus: 'Number one ranking as U.S. M&A advisor to financial services companies in each of the years 2005, 2004 and 2003, ranked by number of deals.' Bingo. Note though that KBW focuses on smaller capitalization companies, so was #3 in M&A in the financial services sector in 2005(and #9 in 2004) based on value of the deals. Still a strong player in this sector though.

KBW's operations break into 3 segments:

1) Investment banking. This includes the M&A component as well as ipo and secondary offering underwriting. KBW has been a solid underwriter of financial related ipos the past few years, carving out a nice little niche for themselves there. In fact they've been #1 in managing U.S. IPOs and follow-on equity offerings for financial services companies in both 2005 and 2004(again based on number of offerings). We've noted above they're also the #1 financials services M&A advisor on deals getting done.. A few recent M&A deals: pending sale of North Fork Bancorporation to Capital One Financial Corporation; the acquisition by Bank of America Corporation of MBNA Corporation; the sale of Household International to HSBC; and the pending sale of Texas Regional Bancshares to BBVA.

Of the 190 clients for whom KBW executed investment banking transactions in 2005, approximately 45% were companies for which they'd executed other transactions during the previous five years.

KBW is a strong player in the small and mid-cap financial services niche. In fact they dominate that niche in both M&A and equity deals. Deals involving financial services companies accounted for 31% of all M&A fees and 21% of all underwriting fees in 2005. If the earnings/expenses for KBW look solid, this is enough here to recommend this deal. M&A has boomed the past few years driven by record corporate cash levels and billion in private equity being put to work. Those trends look to continue going forward. To stress again though: KBW plays in the smaller company space, this far they've not really broken into the large M&A deals. Their specialty is regional bank mergers and buyouts.

KBW in 2006 has seen a sharp increase in structured finance private placement deals.

Investment banking historically has accounted for 50% of revenues.

2) Trading. KBW focuses trading efforts on the sector they know: banking. they've the #1 ranking by trading volume as trader of U.S. bank stocks with less than $5 billion market Also one of the leading traders in the Nasdaq 100 financial index stocks. Commission have historically accounted for 30% of annual revenues, proprietary trading 10%.

3) Research. Number one in five of the seven categories of their research coverage, and second place in the other two categories. Named "Best of the Boutiques" in a survey by Institutional Investor. KBW's research analysts currently cover 489 companies.

Strategies going forward are to expand the European business and expand the asset management business. Currently KBW manges/advises two related hedge funds.

Compensation Expense: Overall compensation is always the largest expense line with these type operations and one needs to make certain that the investment banking entity is not funneling all the profits to management/employees but also growing shareholder value. KBW plans to limit total annual compensation and benefit expense to 55%-60% of total revenues. This is in line with similar firms, although should note it is higher then EVR's 50% target.

History - KBW was founded in 1962 with a focus on the financial services sector. Headquartered in the World Trade Center, 67 employees died on 9/11, approximately 1/2 of KBW's New york staff. Included in this number were five of 9 board members including the co-CEO and Chairman of the Board. KBW planned an ipo in 1999 but that was set-aside after an insider dealing scandal involving the then CEO and a porn star. The ceo resigned and the ipo was scrapped. Not surprisingly there is no mention of this latter event in the prospectus --- if there is they buried it well enough that I didn't find it.


$1.75 X's book value on a $20 pricing.

Revenues in 2005 at $307 were flat coming off a strong 2004. Revenues in 2006 however have really picked up thanks to strong increases across the board in investment banking, commission trades and proprietary trading. Of note the strong gains in investment banking for 2006 are due to underwriting and private placements. M&A is actually down substantially in 2006 from 2005 for KBW.

Based on first 6 months of the year, revenues for full year 2006 appear to be on track for $400-$425 million, a 34% increase.

2005 - Employee compensation expense was 61%, slightly above the post-ipo target. Non-compensation expenses were 29%. Operating margins were 10%, net margins 6%. KBW earned $0.58 a share in 2005. On a $20 pricing, KBW would be trading 34 X's trailing earnings. As a point of comparison, EVR's earnings per share for 2005 were $0.63.

2006 - Earnings will be much stronger due to the anticipated 34% revenue growth to $400-$425 for the year. Employee compensation expense of 58%, well within target. Non-compensation expenses on pace for 24% of revenues. Operating margins anticipated at 17%, net margins 10%. Anticipated earnings per share for 2006, $1.20 - $1.25. No matter how you slice it, KBW is having a great 2006 through the first 6 months. On a pricing of $20, KBW would be trading 16 X's 2006 earnings.

Comparisons. At the top of the piece, we looked at two different types of investment banking ipos. The M&A focused group has fared much better in the market and also carry a much hefty valuation. A quick look at GHL/EVR two M&A focused firms and COWN/TWPG, two underwriting focused firms.

GHL - $1.95 billion market cap, trading 6 1/2 X's revenues and 16 X's book. Trading 27 X's 2006 earnings with an expected 10% revenue growth rate.

EVR - $1.05 billion market cap, trading 5 X's revenues and 6 X's book. Trading 37 X's 2006 earnings with an expected 30% revenue growth rate.

COWN - $217 million market cap, trading. 0.6X's revenues and below book value. Trading 14 X's 2006 earnings. with a 10% revenue growth rate.

TWPG - $420 million market cap, trading 1.5 X's revenues and 1.6 X's book value. Trading 19 X's 2006 earnings with a 10% revenue growth rate.

KBW - $608 million market cap on a $20 pricing. Trading 1.5 X's revenues and 1.75 book value. Trading 16 X's 2006 earnings with a 30%+ revenue growth rate.

So should KBW be valued with the M&A focused firms or the others? I submit it is somewhere in between. KBW has a strong M&A business, historically accounting for 15% of annual revenues. Part of KBW also resemble TWPG. I would define KBW as resembling TWPG but focused on the financial services sector with a much stronger M&A component. KBW is also having a strong 2006, even though the M&A segment has lagged a bit this year. While I don't believe KBW should valued as dearly as EVR, there is definitely room for appreciation here from ipo range. I would value KBW somewhere between TWPG and EVR.

Conclusion - Solid deal. KBW with their strong financial sector M&A operation(#3 in dollar value in 2005), resembles two of the strongest ipos of recent years GHL/EVR. While I don't see this deal quite as strong as those two, they have built a solid niche for themselves in the investment banking sector. Recommending this deal strongly in range.

November 7, 2006, 6:40 am


There were 3 satellite ipos last week. 2 ugly ones and one worth owning. This one:

RRST - RRsat Global Communications

RRST - RRSat Global Communications, an Israeli company, plans on offering 4.4 million shares(assuming over-allotment is exercised) at a range of $11-$13. CIBC and Thomas Weisel are lead managing the offering. Post-offering RRST will have 17.2 million shares outstanding for a market cap of $206 million on a $12 pricing. The majority of ipo proceeds will be utilized to to acquire or establish teleports in the United States and Asia.

From the prospectus:

'We provide global, comprehensive, content management and distribution services to the rapidly expanding television and radio broadcasting industries. Our content distribution services involve the worldwide transmission of video and audio broadcasts over our RRSat Global Network infrastructure. Our comprehensive content management services include producing and playing out TV content as well as providing satellite newsgathering services (SNG).'

Our 3rd satellite ipo of the week. RRST differs from the previous two in that they are a broadcast distribution company, not a voice/data communications provider. RRST provides services to 265 television channels and 80 radio stations in over 120 countries. Continuous distribution customers include Canal Europe, Fashion TV, GOD TV, I Media, Kurdsat, Russia Today, Thai Global Network, and Turkish Radio and Television. Occasional distribution customers include CBS, Fox News, Israeli Channels (2, 5 and 10), Al Jazeera, NBC News, NTV Russia, and RAI Middle East.

Europe accounts for 40% of revenues, North America 20%. Majority of revenues are booked via five year contracts.Current contracted backlog is $101.7 million through 2016, of which $72.0 million is expected to be booked by 2008. RRST utilizes a direct sales force for the majority of business.

Teleports are the ground-based side of a satellite transmission network. RRST's principal teleport is located in southern Israel and provides direct access to satellites that can transmit directly to all the major population centers in North America, South America, Europe, Asia, Africa and Australia. This is an advantage RRST holds as no single location teleport can boast of the same geographic reach. RRST also hosts 7 other satellites, 3 in Israel and 4 others around the globe. From these teleports RRST transmits to 21 satellites and receives transmissions from 48 satellites.RRST does not own the satellites or other transmission capacity such as the fiber optic lines they utilize. Instead they lease time/space. This has kept RRST's capital expenditures fairly low in comparison to companies launching their own satellites.

RRST also provides a few other services. 1)RRST links their teleports to the internet on 4 continents to procure internet capacity. 2) RRST's content management services involves digital archiving and compilation of a customer's programming for the purposes of providing automated targeted programming for a specific channel. RRST provides these playout services to more than 65 television channels for distribution through the RRSat Global Network.

3) Satellite newsgathering services (SNG) through a fleet of ten fully-equipped vans......The bulk of RRST revenues however are content transmission and distribution to and from a fleet of satellites.

Industry - The driver is the globalization of content. The number of satellite television channels worldwide grew from approximately 1,000 in 1995 to more than 13,000 in 2005, and is expected to grow to more than 29,000 television channels by 2013. RRST believes HDTV will lead to increased bandwith needs and should be a revenue driver into the future. The teleport sector generated revenues of approximately $13 billion in 2005.

Barriers to entry - RRST believes there is a significant barrier to entry for their business. From the prospectus: 'to offer global content distribution services, it would be necessary to procure a critical mass of transponder capacity on multiple satellite platforms, which would entail negotiations with multiple suppliers. In addition to incurring the cost of the acquisition of this capacity, a potential new entrant would need to incur a substantial long-term financial commitment for the capacity, without any assurance of corresponding revenues (particularly since our business entails a lengthy sales cycle, typically 6 months to a year, before receipt of a customer commitment).' In other words a new entrant into this space would need to make a substantial commitment of capital well before receiving revenues.


$2 a share in cash post-offering, no debt.

4 X's book value on a $12 pricing.

RRST receives most of their revenues in US dollars, however most expenses are in Euros or New Israeli Sheckels(NIS). There are also certain embedded derivatives involved when RRST enters into contracts with customers in which the method of payment is not the principal denomination of that country. RRST believes the gains/losses from these embedded derivatives are not material to operations.

At least 10 straight quarters of revenue growth. Revenues were $24 million in 2004, and $31.3 million in 2005.Through the first 9 months of 2006 appear on track $43 million in 2006, a 37% annual increase.

2005 - $31.3 in revenues with a 37% gross margin. Operating margins were 24%, net margins 17%. Earnings per share were $0.31. On a pricing of $12, RRST would be trading 39 X's trailing earnings.

2006. Based on results through first 3 quarters, RRST should grow revenues by 37% to $43 million. Gross margins in the 36% range with operating margins of 24%. Net margins should again be in the 17% range with earnings per share full year of $0.43. On a pricing of $12, RRST would be trading 28 X's 2006 earnings.

Conclusion - RRST has carved out a nice niche in an evolving and growing sector, global satellite broadcasting. This is a well managed company growing revenues consistently quarter after quarter. Because very few worldwide broadcasters have their own distribution network(the big US broadcasters being an exception) demand for RRST's services should continue to grow annually the next 5+ years. This is a far better deal then the other 2 satellite ipos this week. I like this deal. Solid growth, strong management and a small offering with plenty of room to appreciate mid to longer term. Recommend.

November 4, 2006, 11:51 pm

week of 11/6

Well for the 2nd week in a row, the free blog ipo piece will be a 'pan'. When things get a little too enthusiastic, we at tradingipos tend to pull in the reigns a tad. We passed on 3 of this weeks offerings at ANY price, recommending just one. 3 of the past week's deals broke pricing, including one that was beyond ugly, orbc...hint, 9% gross margins do not make a viable business model...orbc has 9% gross margins. who were the suckers taking stock in that deal? did they know the margins were that ugly? We did like one of the three satellite deals quite a is the one that didn't break pricing.

Alright, the promise here is next week to actually put a positive piece on the free blog...there is one in the 11/6 week we're quite high on here at

16 on the schedule in the next 2 weeks...we'll have pre-ipo analysis pieces on them all in the subcriber section of the site...We also have a lively forum discussion on ipos and many other market accurate pre-ipo open indications for the good deals.

GSAT - Globalstar

GSAT - Globalstar plans on offering 7.5 million shares(assuming over-allotment) at a range of $16-$18. Wachovia and JP Morgan are joint book runners, Jefferies co-manager. Post-offering GSAT will have 82.5 million shares outstanding for a market cap of $1.402 billion on a $17 pricing.

The outstanding shares number includes shares yet to be purchased. GSAT for funding purposes has made a deal with Thermo Funding Company for Thermo to purchase a little over 12.4 million shares by 12/31/11 at a fixed price of $16.17 per share. Thermo Funding may purchase these shares at any time regardless of GSAT stock price. 180 day lock-up period applies to any purchases. Thus far Thermo has purchased just under 1 million shares. It does not appear that Thermo must purchase these shares, just that they've a right to if they desire. Obviously if at some point GSAT's share price is well above $16.17, Thermo Funding will be purchasing these shares. If below they will not. This is really not ideal for new shareholders as it presents a pretty significant potential future stock price drag and shareholder dilution on shareholders post-ipo. If Thermo fulfills their purchase, GSAT shareholders would be diluted 15%+. For this sort of deal, I would much prefer a longer lock-up then 180 days for these shares. That's not the case though, Thermo will be free to sell any shares purchased at any time, 180 days from purchase. Also other insiders have the same rights as Thermo for just under 800,000 shares, which can be bought anytime until 12/31/11 at $16.17 a share. In order to give as accurate a picture of market cap, I counted all of these shares into current share count.

Entities of Thermo will own 70% of GSAT prior to these upcoming transactions. Note that while it appears Thermo will be paying near ipo price for 12 million shares going forward, the 70% they already own on ipo were essentially free shares. Thermo's full position in GSAT assuming they purchase all shares would be roughly $3 a share overall. This is even a bit more deceiving as Thermo will only be a purchaser of additional shares if they're already 'in the black' and trading over $16.17.

From the prospectus:

We are a leading provider of mobile voice and data communications services via satellite, with an estimated 10.2% share of global subscribers in the mobile satellite services industry in 2005.

GSAT is one of three satellite communications companies ipo'ing this week. GSAT operates 43 in-orbit satellites and 25 ground stations to offer wireless services where traditional wireless and wireline do not and cannot. GSAT provides voice and data communications services in over 120 countries. In operation since 2000, GSAT currently has 236,500 subscribers.

GSAT offers voice communications, 1-way data communications and 2-way data communications over 27.85 MHz. GSAT owns a global license for this frequency. GSAT also owns a license to operate over 'ancillary terrestrial components(ATC) in conjunction with their satellite services. GSAT's ATC component allows them to operate in dense urban areas and inside buildings. GSAT services only operate with equipment designed specifically for their network. Equipment includes the usual communications devices such as data modems and fixed & mobile phones.

History - Globalstar was founded in 1993 by Lorel and Qualcomm. Much like ORBCOMM, Globalstar borrowed heavily to launch their initial fleet of satellites in the late '90's. This story is very similar to the landbased fiber build-out of the late 90's. Globalstar(symbol GSTRF) ipo'd in 1995 and reached a high of $50+ in early 2000. By 2001, Globalstar was swamped in debt and a lack of revenues and customers. Unable to service the debt, Globalstar filed for bankruptcy in early 2002. The stock which had fallen below $1 ended up worthless. Creditors now own a chunk of the new Globalstar, while equity holders of the old Globalstar lost their entire investment.

GSAT has contracted with Alcatel to build 48 new satellites for GSAT by 2013. GSAT plans on launching these satellites as they are ready(they'll be delivered in 2 'batches' of 25 and 23). the total cost through 2014 is budgeted at $1 billion. GSAT plans on paying for this over the next 7 years through proceeds from this offering, a $100 million credit line drawdown, the $200 million stock purchases from Thermo Funding and through cash flows. GSAT anticipates approximately $600 million in cash flows over the next 7-8 years going towards these satellites. The bulk of the new satellites will be replacing current satellite constellation and GSAT expects these launches to provide service through 2025. Keep in mind that if GSAT has overestimated cash flows, a repeat of the original Globalstar could occur.

Also GSAT plans to heavily invest in their ATC network, apparently in an attempt to compete with existing wireless companies. GSAT expects this to cost $2-$3 billion and anticipates a future joint venture to accomplish this.

GSAT largest market/customer group are US federal, state, and local government. US government entities accounted for 15% of 18 month revenues ending 6/30/06.

Key competitive strengths are the ability to operate inside buildings and in areas shielded from the sky. Also GSAT believes their global license provides an edge as well. Also GSAT is the only satellite network operator currently using the patented Qualcomm Incorporated CDMA technology. Not so coincidentally Qualcomm is the only GSAT compatible manufacturer for voice communications working on GSAT's network.

Competition - GSAT expects newer satellite competition from Iridium, ICO and TMI all three of which have 2G satellite licenses. The big threat to me though is the advances being made in traditional wireless coverage areas. This is the real threat in my opinion. As the branded wireless companies continue to expand their service areas into rural and mountain regions, the possibility exists for a lessening in demand for GSAT's services. GSAT has positioned themselves as an operator of wireless voice/data services for places not traditional serviced by the branded terrestial wireless entities. With billion in capital expenditures on GSAT's horizon, they could potentially be in some trouble if the wireless services expand into GSAT's 'turf.'.


Factoring in future stocks sales to Thermo and the additional debt coming on and planned capital expenditures: No cash and $150 million in debt. Note that GSAT will have $5 a share in cash just after offering. All of this cash however is committed to Alcatel for replacement satellites. Note that even though the debt levels are not all that high, the annual interest rate here is a lofty 11%. It would appear after this business model resulted in bankruptcy a few years back, GSAT will have to pay through the nose to borrow going forward.

There were material weaknesses found in GSAT's audited 2005 statements. These appear to be a bit more serious then the usual. The usual these days being that small companies coming public just didn't have enough accounting staff on hand through the fast early growth stages. GSAT's issues appear more related to internal inventories and receivables, two areas I do not ever like seeing internal control deficiencies being reported.

Revenue have grown steadily since the bankruptcy. $84 million in 2004, to $127 million in 2005 to an anticipated $150 million in 2006. That would put 2006 revenue growth at 15% or so. Note however that the bulk of the growth here is from equipment sales. Direct costs to Qualcomm for this equipment grew at a faster rate then equipment sales growth. In other words, it appears there is a chance here that this is not actual equipment sales growth. GSAT lost money on this increased equipment revenue through first 6 months of 2006 - They're paying Qualcomm more for this additional revenue then they sold the products for.

2005 - Gross margins were 50%. Operating margins were 17%. Unfortunately pro forma debt(the debt that will be taken on post-ipo) would have eaten up 3/4's of operating earnings. Net margins were 3%(again factoring in planned future debt levels). Earnings per share were $0.05. On a pricing of $17, GSAT would be trading 340 X's trailing revenues.

2006 - through first 6 months it appears GSAT will grow revenues roughly 15% to $150. Much of that growth is due to equipment sales. This growth is sketchy to me as expenses to Qualcomm for these revenues increased faster. GSAT buying revenue growth ahead of ipo? This shows in gross margins, which dipped first 6 months of 2006 to 43%. Operating margins declined all the way to 8%. Factoring in future debt levels, GSAT will show a loss in 2006. Due to a tax benefit pre-ipo,
GSAT will actually book a nice bottom line number in 2006, but don't be fooled. GSAT appears as if they're set-up to post a loss or breakeven number for 2007 based on '06 operations.

A very complicated internal structure here with a bunch of deals with major holder Thermo and former co-founder Qualcomm. I'm always leery when there are so many deals internally and with closely related partners. This is one of the more convoluted deals in this regard I've seen in a while.

Conclusion - A number of things I don't care to see: 1) Too many convoluted internal/external deals. 2) A very aggressive market cap based on revenues. GSAT on a $17 pricing will be trading nearly 10 X's 2006 anticipated revenues. This for a data/voice communications provider. Sprint for example, trades under 1 X 2006 revenue. 3) this business model has previously gone bankrupt. Yes the plan is a bit different this time, although it would appear to me GSAT's cash flow projections the next 7 years are a bit aggressive. 4) the annual debt interest rate is steep here, showing an unwillingness of bans to lend to this model. 5) the operating margins and earnings don't really justify the current market cap. GSAT has a lot of growing to do to justify initial in-range pricing market cap. 6) This big one: 2nd time around for this company. the first time around they loss stock investors 100% of their investment. In a world full of stocks, why buy one that lost previous investors everything they invested. Pass.

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