Satellite Radio IPO Carries a Disclosure
WorldSpace Tries To Defuse Concern Over Saudi Backers
By David S. Hilzenrath
Washington Post Staff Writer
Friday, August 5, 2005; D01
http://www.washingtonpost.com/wp-dyn/content/article/2005/08/04/AR2005080401969_pf.html
WorldSpace Inc., which was created to beam satellite radio to the poor of
the developing world and helped spawn XM Satellite Radio Holdings Inc. to
serve the U.S. market, yesterday sold stock to the public in an initial
offering that valued founder Noah A. Samara's holdings at more than $100
million.
In addition to allowing Samara to cash in millions of dollars of shares
yesterday, the company said in a regulatory filing that the IPO would
trigger stock awards for Washington insiders who serve on WorldSpace's
board -- Jack Kemp, a former congressman, cabinet secretary and vice
presidential candidate; Charles McC. Mathias Jr., a former U.S. senator
from Maryland; and William Schneider Jr., a former undersecretary of state
who heads a scientific advisory board at the Pentagon.
The cash infusion also could improve potential returns for the company's
longtime backers, a group of Saudis that includes Salah Idris, the owner of
a plant in Sudan that the United States bombed in 1998 alleging it had ties
to Osama bin Laden, and Khalid Bin Mahfouz, a banker who settled
allegations in the BCCI bank scandal in the early 1990s and has since been
accused in a lawsuit of backing bin Laden financially.
This prompted WorldSpace to make an unusual disclosure to the Securities
and Exchange Commission: "Allegations of ties between certain of our
investors and terrorism could negatively affect our reputation and stock
price." The investors "have repeatedly denied all such allegations," the
company said, adding that they no longer have any "voting control rights."
A company spokeswoman declined to comment, saying securities regulations
prevent Samara and others from talking about the company during the
so-called quiet period around the offering.
The offering was a boost for the D.C. company, which has lost more than $2
billion since it was founded in 1990. WorldSpace reported revenue of $8.6
million last year, down from $13.1 million in 2003. The company launched
its first satellite in 1998 and recently counted 63,000 subscribers across
Africa, India and the Middle East, according to a company filing with the
SEC. That was far short of the millions of subscribers the company told the
SEC that it must ultimately have "in order for our business model to succeed."
WorldSpace said before the offering that it planned to sell 11.5 million
shares, which would have grossed $241.5 million at the offering price of
$21. It did not report the number of shares that it actually sold. The
company said in an IPO prospectus that Samara planned to sell shares that
would have been worth $7.7 million.
The new stock, which trades on the Nasdaq Stock Market, enjoyed a warm
reception. Investors bid up the share price to a high of $26 before it
closed at $22.36.
Roger J. Rusch, a satellite communications consultant, said the IPO
reminded him of the tech bubble of the late 1990s. "I cannot understand why
any serious investor would buy into this enterprise," said Rusch, who is
president of TelAstra Inc., which advises investors. "It's the old argument
that there's a new economy, and the way that works is that companies
operate at a loss and they find new investors to fund the operation, so it
operates like a charity."
Amber Zentis, a former director of investor relations for WorldSpace,
countered that the business could become a phenomenon. "In other parts of
the world, you can't charge as much per subscriber" as in the United
States, "but there are millions more subscribers to be had."
Samara, 47, grew up in Ethiopia and Tanzania, the son of a diplomat,
according to a 1998 Washington Post story, and earned a law degree at
Georgetown University. Before founding WorldSpace, he worked at the law
firm Venable, Baetjer, Howard & Civiletti LLP and at an early satellite
telecommunications company called Geostar Corp.
WorldSpace helped launch XM Satellite Radio years ago with initial funding
and technology but sold its stake in 1999. XM chose the richer U.S. market
and arranged to have its radios installed in cars, amassing 4.4 million
subscribers. Samara, meanwhile, focused WorldSpace on poorer parts of the
world, such as his native Africa, where he saw a desperate need for
information.
It "was not money that inspired the creation of the WorldSpace system. It
was need," Samara said in congressional testimony on Africa in 2001, citing
especially the spread of AIDS. "The sooner we infuse Africa with
information, the sooner it will develop the means to generate greater
income, heal its sick, educate its populace and govern with fairness and
compassion," he said.
One challenge Samara faced was getting his radios distributed among
impoverished populations. WorldSpace began offering free service in Africa
in 2000. In an evolution of Samara's plan, it is now concentrating on
affluent urban populations in India, with ambitions to penetrate China and
Western Europe.
In its public offering statement, WorldSpace identified potential risks and
obstacles. It said its auditors "have identified material weaknesses and
significant deficiencies in our internal controls, and if we are unable to
develop, implement and maintain appropriate controls we will not be able to
comply with applicable regulatory requirements imposed on reporting companies."
"We have experienced severe working capital constraints for several years
and, as a result, we have operated with very limited staffing of key
functions, including accounting," it said. The firm's finances improved in
December, when institutional investors put up $155 million.
WorldSpace launched a satellite serving Africa in 1998 and another serving
Asia in 2000. The satellites are designed to operate for 12 years, the
prospectus said. Much of the ground-based infrastructure that would enable
the company to introduce mobile service has not yet been built, the filing
said.
The money men who nurtured WorldSpace with investments of more than $1
billion over the years include Idris and Bin Mahfouz. Idris has stated that
the U.S. government made "a grave error" in bombing his factory in Sudan,
and he succeeded in getting the Treasury Department to release $24 million
of his assets that it had frozen. The intelligence that prompted the strike
on his factory has been disputed.
The Federal Reserve Board in 1992 charged Bin Mahfouz with helping BCCI
conceal its ownership and financial condition. He denied the allegations
and agreed to pay hundreds of millions of dollars with other parties to
settle various claims. In litigation over the terrorist attacks of Sept.
11, 2001, families of victims have alleged Bin Mahfouz was "a major
financial sponsor" of bin Laden and his terrorist network. A lawyer for Bin
Mahfouz has written that his client "has never supported or had any
relationship whatsoever with Osama bin Laden or terrorism of any kind."
The company says the Saudis no longer have "any direct debt or equity."
However, Idris holds a majority stake in a Singapore company that holds
17.4 million shares, WorldSpace said in an SEC document. The Singapore
company is controlled by Samara. Two sons of Bin Mahfouz control a Cayman
Islands company that is entitled to 10 percent of WorldSpace's earnings
before taxes and other charges under a royalty agreement, a WorldSpace
filing said.
Samara's direct and shared stock holdings give him control of WorldSpace,
including the election of board members, the company reported, and
WorldSpace has reserved 5 percent of its satellite capacity for a nonprofit
organization he chairs.
In December, Samara repaid a debt of $1.6 million to WorldSpace, the
prospectus said.
Samara held stock options, exercisable within 60 days, that would have been
worth $104.4 million at an estimated offering price of $20 -- less than the
actual offering price of $21, the company reported. He also held shares of
restricted stock, which were to vest in 180 days, worth $13.2 million at
yesterday's close, the SEC filing said.
Altogether, Samara controlled or shared control before the IPO of 28.7
million shares, worth $641 million at yesterday's close. The company did
not say how much of that he personally owns.
================================
George Antunes, Political Science Dept
University of Houston; Houston, TX 77204
Voice: 713-743-3923 Fax: 713-743-3927
antunes at uh dot edu
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