Intelsat Ltd.’s proposed purchase of PanAmSat Corp. would alter the industry landscape by creating the largest fixed satellite services operator with a dominant position in the crucial U.S. market for video and television transmissions.
What remains to be seen is whether the $3.2 billion deal, announced Aug. 29, would be beneficial to the long-term health of the industry, Intelsat included.
The merger seems driven by a compelling logic, aside from the obvious cash windfall it would bring to the private-equity firms that agreed to purchase PanAmSat in 2004. It is not unlike the logic behind other landmark telecom and aerospace mergers of the last decade or two: Size means clout, which leads to savings that in theory can be passed to the customer, to everyone’s benefit.
In Intelsat’s case, the increased clout likely would manifest itself in three particular areas: i nsurance, satellite manufacturing and launch services.
An Intelsat-PanAmSat combo undoubtedly would put downward pressure on insurance premiums, not only because of the new company’s ability to do package deals but also because its business operations would be less vulnerable to individual satellite and launch failures. Intelsat already self insures its on-orbit satellites: If one fails the company has sufficient back-up capacity to quickly restore service in key markets. This capability would only increase with the addition of PanAmSat’s fleet.
The merged company also might be able to demand lower prices from satellite manufacturers and launch services providers, again because of its size. On the other hand, it could be argued that satellite and rocket makers already operate at the margins and have little, if anything, left to give when it comes to price.
Advocates of the merger will point out its benefits to the major customers of fixed satellite services, including the U.S. government and television news outlets such as the BBC and CNN. These organizations, the logic goes, will now have a one-stop shop for all of their commercial satellite services needs in almost every conceivable geographical market.
That may well turn out to be the case. But it is also plausible that the new company would face regulatory barriers in certain Asian or Latin American markets, just to name two examples. National regulatory authorities in these regions typically are less assertive than their U.S. or Western European counterparts, but no one can anticipate how they might react if they perceive a bulked-up Intelsat as a threat to their own national satellite operators.
Also potentially working against Intelsat is the fact that absorbing PanAmSat will leave it with an even larger debt load than it is saddled with today.
For the U.S. government — the largest single consumer of commercial satellite services — the near-term impact of an Intelsat-PanAmSat combo would be minimal since both companies are nearing the end of their current capital expenditure cycles. But it is fair to ask whether the new company over time would eliminate excess or underutilized transponder capacity, potentially limiting the U.S. government’s options should the need suddenly arise for large amounts of bandwidth in some remote corner of the globe, as happened when U.S.-led forces invaded Afghanistan and Iraq.
Many would view an Intelsat-PanAmSat merger as the opening round in a new wave of industry consolidation whose urgency will only grow as regional satellite operators find themselves increasingly unable to compete against the global players. But the extent to which such consolidation is inevitable is open to question. Governments in Asia, Latin America and elsewhere will not necessarily let pure business logic determine whether they keep their national operators. In fact, in the midst of the consolidation that already has taken place, new operators have emerged, often with dubious business cases.
What the merger announcement — along with recent stock-market activity by satellite operators large and small — demonstrates beyond a reasonable doubt is that the satellite telecommunications sector remains highly dynamic. How things will evolve in the coming years, and whether or not the merger — if approved — will provide the benefits that many expect is far trickier to assess.
Regulatory and industry-health questions aside, the irony of the Intelsat-PanAmSat marriage proposal cannot be allowed to slip past without mention. After all, PanAmSat’s founder, the late Rene Anselmo, spent vast resources in the company’s early days doing battle in the court of U.S. regulatory policy against Intelsat, the global cooperative that did everything in its power as the industry’s government-backed, 800-pound gorilla to quash the upstart satellite operator.
Even more ironic is the fact that, whatever the future holds for the PanAmSat name, Mr. Anselmo finally has won — Intelsat today behaves like the private company he always thought it should be.
