Analyst Challenges Comstac Satellite Projections
The purchase of the companies that operate global fixed satellite services (FSS) by private-equity firms likely will limit worldwide demand for new commercial, geostationary satellites to just 14 or 15 annually for the next several years, said Hoyt Davidson, chief executive officer of New Canaan, Conn.-based Near Earth LLC, a boutique investment banking firm that focuses on space and satellite companies.
Davidson offered his forecast during a May 26 meeting of the Federal Aviation Administration’s Commercial Space Transportation Advisory Committee (COMSTAC). He pointed out that his assessment was less optimistic than the annual average of 20.5 new satellite orders for the next 10 years, a projection published in a new report of the COMSTAC Technology & Innovation Working Group.
While fewer geostationary satellites will be launched during the next three to five years, a slightly increased number of small geostationary satellites could be ordered to serve emerging markets, partially cushioning the blow to satellite manufacturers, Davidson said.
The private-equity firms that now control PanAmSat, News Skies Satellites and Intelsat, will look to consolidation and joint ventures as ways to limit capital investment in new and replacement spacecraft, Davidson said during his presentation. However, the capital markets generally will be supportive of the large FSS operators and consumer-oriented satellite services companies, he said .
The FSS companies currently are characterized by low growth and high cash flow, but all of them are hurt by significant overcapacity, especially in certain regions, Davidson said. FSS operators owned by private-equity firms also face “significant burdens” to pay dividends to their investors and interest on their hefty debt, he said.
“Private-equity firms are the best in the world at extracting value from their assets,” Davidson said. Many of those firms already have recouped the lion’s share of the equity they invested in the FSS companies, he added.
Small and regional FSS companies will be in a quandary due to overcapacity in the transponder market, low transponder pricing, generally poor access to capital and national pride that will tend to block needed consolidation from occurring, Davidson said.
Satellite broadcasting, broadband and voice services aimed at consumers also will need fewer launches in the United States and Europe, following the next three to five years, Davidson said. In contrast, demand for such services in other regions of the world will rise during the next three to five years before tapering off, he said.
High-definition television and broadband services both will spur the use of satellite capacity in the coming years, while virtually every service provider is looking to tap growing demand from government customers, Davidson said. Broadband, in particular, will be needed to bundle with satellite video services to compete with cable modems and DSL, he added.
Another sector that is luring investment spending consists of ground segment products and services, Davidson said. That trend will be driven by increasing transponder demand for service in the United States and Europe based on Internet Protocol standards, growth in government satellite services and a rising need for commercial imagery virtually everywhere, he added.
However, the small size, low growth and slim profit margins of ground equipment companies will limit the interest of private-equity firms in pursuing leveraged buyouts of such operations, Davidson said.
Companies eyeing space tourism and other risky endeavors are going to need to rely on seed capital from so-called angel investors rather than traditional lenders and investors to finance their plans, Davidson said. Impressive early demand for space tourism is surfacing, but the fledgling sector has not been tested yet by failure, he said .
The successful flights last year of SpaceShipOne, the first privately financed vehicle to fly into space, has spurred interest in space tourism. Richard Branson, the founder of the Virgin Atlantic Airways and many other businesses, has formed Virgin Galactic to provide paying customers with brief flights into suborbital space.
However, significant technical breakthroughs still are needed to enhance the affordability and safety of spaceflight for adventurous private citizens, Davidson said. The promise of space tourism is “driving seed capital,” but plenty of work remains to be done before such ventures would become viable, he said .
On the other hand, the public capital markets are open for “proven” commercial satellite businesses, which attracted more than $20 billion during 2004, Davidson said. For startup ventures, government contracts from NASA and the Department of Defense can be “very helpful” in gaining needed financial support, Davidson said.
The launch industry has helped itself with improved reliability but U.S. providers need to cut their costs and prices, as well as reduce their regulatory burdens, to expand their market share, Davidson said. High U.S. launch costs currently are pushing satellite operators to use lower-priced Russian launchers, for instance, he said .
The cost of launch insurance also remains a “huge burden,” Davidson said. Excess launch capacity has dropped the price of a commercial launch to roughly $55 million to $70 million, down from $90 million to $110 million, he added.
Christopher Kunstadter, a COMSTAC member and executive vice president of New York-based U.S. Aviation Underwriters, told the attendees that the comparatively high insurance rates for launch and in-orbit insurance will not be curbed by the introduction of new launch vehicles because new vehicles tend to have teething problems.
“Our experience with new launch vehicles has not been that great,” Kunstadter said. Insurers must be educated about new launch vehicles as much as possible to let them adequately understand the risks, he explained.
Indeed, insurers also need to seek returns of 30 to 50 percent for writing launch insurance to justify putting their capital at risk, Kunstadter said. The volatility of the aviation underwriting business requires such returns to achieve an average profit margin of roughly 10 percent, he added.
Underwriting changes that now only pay for total constructive losses when at least 75 percent of a satellite’s capacity is impaired, compared to the previous threshold of 50 percent, have helped to improve financial results for insurers during the past year, said John Vinter, president and chief executive officer of International Space Brokers. Vinter chaired the COMSTAC meeting.
However, the bottom-line result is that insurers have earned only $200 million in profit from $4 billion in premiums since 1994, Kunstadter said. The roughly 1.2 percent return needs to improve, he added.
Prices that have risen to as high as 25 percent of the value of a mission have led many operators, especially those owned by private-equity firms, to self-insure.