First Coffee for 23 February 2006

David Sims : First Coffee
David Sims
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First Coffee for 23 February 2006

By David Sims

david@firstcoffee.biz

The news as of the first coffee this morning, and the music is Robert Earl Keen’s What I Really Mean, an album which is, if possible, even better than I had thought at first:

One thing that’s been missing in this whole GlobeTel deal so far is how it looks from the other side. So I decided to get an industry opinion on the Russian angle, since that’s been virgin ground in the journalistic coverage so far.

Of course I have no stake in the company at all, financial or otherwise, and I don’t cheer for companies to fail. I’d like to see these guys pull this off, it’d be a massive coup and shake the Wi-MAX industry up in a good way. If it all turns out to be hot air, that’s no good for anybody – bad for the shareholders, bad for the industry, bad for Russian investment. Nobody wins. And I do believe strongly that stable investment in the former Soviet Union is crucial, so I’d hate to think GlobeTel is playing fast and loose here.

Yet from their lairs in disused missile silos in North Dakota, bought for a good price from the Y2K refugees, the tinfoil hat brigade mutters darkly about the “motives” of journalists who cover GlobeTel’s spectacular Wi-MAX in Russia claims in anything less than sycophantic manner – “why’s this clown dissing my stock? Why doesn’t he just believe GlobeTel’s press releases like I do?”

Actually the better question is, why would anyone take GlobeTel’s claims – any company’s claims, GlobeTel’s, Microsoft’s, Dubai Ports World’s, anyone’s – at face value? But hey, don’t take my word for that. “If I were an investor, there are sure a lot of questions I would want answered,” says “Nigel,” a Brit who’s worked on emerging economy telecom projects, many in Russia, as his career.

The plot so far:

GlobeTel stock shot up 75 percent in a single day in late December after the firm, which describes itself as a “diversified, global telecommunications and financial services company” announced a $600 million Wi-MAX wireless network deal for the 30 largest Russian cities.

GlobeTel CEO Tim Huff predicted at the time that “Russia will, quickly and at a relatively modest cost, have a wireless infrastructure that will rival any in the industrialized world,” according to Red Herring.

He promised GlobeTel would have $150 million of the financing in place by January 31. That deadline came and went, GlobeTel announced that it had extended by 30 days the payment deadline for their Russian partners, LLC Internafta, to present its first payment “so that lawyers and bankers for the parties may continue to work on structuring the payment to be in compliance with banking and currency transfer regulations” in the United States and Europe.

“This is a highly complex international transaction on which all sides continue to work together in good faith,” Huff pleaded. “There are numerous legal and regulatory issues that must be resolved and those steps require time and specialized expertise.”

The real head-scratcher here, as Motley Fool’s Seth Jayson puts it, isn’t that things in Russia get snagged, they do, but “how is it possible for this unheard-of Florida company, with little track record, to suddenly vault past established equipment makers like Qualcomm, Cisco, Nokia, and Motorola, not to mention powerful multinational telecoms?... Especially since GlobeTel seems to have no technological advantage, as evidenced in its regulatory filings, where it explains that the equipment and software it uses are readily available from major suppliers on the open markets?”

Jayson also finds the only publicly-identified member of Internafta is Maxim Chernizov, who made his money in “rare earth metals” and admits he has no experience in telecom or wireless. He swears he isn’t Mafia.

Wondering how all this looks from the other side, I sought Nigel’s opinion. “Funny,” he wrote, and you could almost hear him sigh. “All the operators here in Russia are getting lots of calls on GlobeTel, and even the authorities are asking us about it.”

The Russian market has lots of potential, but the penetration of broadband is not going to be that spectacular, Nigel thinks, “even amongst us that are enthusiastic over the market potential. We don’t see more than 10 per 100 penetration for broadband subscribers (note subscribers and not users) over the next 6 years on a nationwide basis.”

Still, given that current penetration is less than 1 per 100, that’s big growth. GlobeTel is onto something, at least in theory, since “at this sort of density, DSL and cable are not good economic options. Too much money has to be invested up front. And, in most cases, the existing copper can’t accommodate these technologies so it has to be replaced which adds to the cost,” Nigel explains.

“Conversely, wireless is pretty well suited in terms of coverage versus cost. And, with wireless there is better matching of costs and revenues, so it’s friendly to investors in these sorts of economies.”

Now GlobeTel seems focused on both voice and data, which Nigel thinks would greatly expand the addressable market, and would justify a $600 million investment. The hitch, he says, is that “mobile voice requires different licensing, and I am not aware that there are licenses available right now. There is no license available even for mobile WiMAX (802.16e), only fixed wireless.”

One thing I hear from people who have worked on emerging economy telecom projects is that they don’t throw big money at these markets without really understanding what they’re getting into. “I sure wish I had $600 million to spend in Russia, but even if I had a quarter of this amount, it would be a challenge to invest it wisely,” Nigel observes.

By the way, according to Nigel, it takes a good nine months in Russia to obtain the spectrum permits and to file the “radio plans” with the State Spectrum Committee and the Federal Authority for Communications before an operator can begin operation. Just like in the United States, the operator needs to specify to the authorities the base station locations, equipment being used, etc.

“This all takes a lot of time and experience,” Nigel notes, adding that “most of the really interesting spectrum is not even available at this point. That’ll change as more spectrum is “cleaned” and turned over to civil authorities, but Nigel shivers at the prospect: “In any case, I would not want to be doing this for the first time in Russia.”

Nigel doesn’t think Huff is out of line in not talking to the press, saying it’s not unusual to be secretive when planning such a huge project, “secretive on partners, equipment, spectrum, license applications, etc. However if I were an investor, there are sure a lot of questions I would want answered.”

In other words, Russia has a difficult investor image already. If GlobeTel is a hoax, Nigel says, the association with Russia will probably hurt the credibility of legitimate operators who are in the equity markets. Another reason to hope they pull this sucker off.

Jayson wrote a piece for Motley Fool titled “GlobeTel’s Australian Odyssey,” which is required reading before sinking a nickel in GlobeTel, where he raises a number of other questions investors should want answered.

GlobeTel is, in fact, “primarily a VoIP telephony provider that, until recently, was most notable for its years of heavy losses,” Jayson found: “GlobeTel’s much-hyped foreign operating units, which are always trumpeted with promising PR, not only come under strange circumstances, but they also often do very strange things and meet with very strange ends.”

(Incidentally, someone speculated that Sir Chris switching to independent director hints that Huff’s getting his ducks in a row to list on NASDAQ, where you need things like independent directors. Bear in mind that back in January Dorian Klein became one, too.)

Of course of GlobeTel does swing the deal, and stranger things have happened, it’ll be a great David-kills-Goliath story, a lot of investors will be very happy, and Russia will get improved Wi-MAX coverage. I have no reason not to hope that all that happens, but at this point no reason to think it will, either. Right now my gut’s telling me it’s not going to happen, but I’ve been wrong before and it would be nice to be wrong again.

Stay tuned.

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