When private equity investors led by BC Partners and Silver Lake Partners purchased Intelsat in February 2008, it was a leveraged buyout that followed a similar transaction by Intelsat’s previous owners and left the world’s biggest satellite-fleet operator with $15 billion in debt.
Intelsat’s competitors said the new owners would seek to drain further cash from the company before exiting in a stock offering, and that Intelsat would not be given the cash it needed to grow.
Intelsat Chief Executive David McGlade disputed this at the time. Two years later, McGlade’s optimism appears justified.
Intelsat is in the midst of a major fleet-replenishment and expansion program that will total at least $2 billion in capital investment between 2010 and 2012. The private-equity owners from 2008 are still there, and they appear in no hurry to cash out.
McGlade spoke about his company’s ownership and near-term prospects with Space News staff writer Peter B. de Selding.
Is it fair to assume that your private-equity shareholders will seek an exit in the coming year, through a stock offering or otherwise?
In February it will be three years since our current sponsors arrived. I had always expected them to be in place longer than our previous sponsors, and this has been the case. Our owners have been very patient with us and have been supportive of our growth strategy, as anyone can see with our current satellite procurement program.
The current sponsors have not taken any returns out of the business. We have been able to use our free cash flow to fund the business. A logical exit for them is of course an IPO, but that’s not the only option. There are others. Whatever form it takes, will it happen in the next year? Maybe. We would be an extremely attractive investment for prospective investors with our nearly $10 billion in backlog.
You recently announced you would be repaying some of your debt in cash, and not in further debt. Was this decision forced on you by your debt covenants?
Not at all, and we could continue with the PIK [payment in kind, instead of cash] for some time. But we want to start reducing our debt over time, and we thought the current cash flow from the business permitted us to pay a part in cash. Adding further debt is expensive.
You reported generally flat revenue for the first half of the year but said you expect the second half to be better. Why?
In the first half we had delays with the start of the U.S. Navy’s CBSP [Commercial Satellite Broadband Program], and there have been budget pressures on this. We also had two satellite anomalies, with the IS-4 and Galaxy 15 problems. IS-4 is an older satellite. As for Galaxy 15, we’ll have to see how that turns out.
In your view, would U.S. and Canadian regulators look favorably on an Intelsat acquisition of Telesat of Canada if the Canadian operator became available?
The recent change in Canadian law gives Telesat more flexibility, not only on the ownership side but also operationally, and it could allow an acquirer to realize synergies.
I don’t know what kinds of resources Canadian regulators would like to see remain in Canada. As for the competitive picture that U.S. and Canadian regulators would want to look at, one could make a strong case that there is a competitive environment already, and that this would not be affected.
When you look at the competition coming from fiber, from SES, EchoStar, ViaSat, Hughes and from future 4G mobile networks, you see a very robust marketplace in North America. The U.S. Department of Justice obviously would want to test this, but that’s how I see the market.
The top three commercial satellite-fleet operators — Intelsat, SES and Eutelsat — are all in the middle of large fleet-replenishment and expansion programs. Meanwhile, the smaller operators are not leaving the market. Is there a danger of overcapacity around 2015?
We are very, very careful when we look at each region before deciding on whether to put a new satellite there. We like to get as much backlog as possible. IS-25 [purchased at auction and recently moved to an Intelsat slot] is an exception. We saw early in the last decade, around 2000, that there was an overcapacity in the market, and we want to avoid that.
We have built flexibility into our fleet to be able to meet demand as it evolves, so I think we have protected ourselves against an overcapacity situation, should it occur in some markets. It allows us, in some cases, to move satellites around. Nobody grooms their fleet as well as we do.
Recently we have seen your competitors strike deals to increase their presence in the Middle East — Eutelsat with Nilesat of Egypt, and SES with Yahsat of the United Arab Emirates. What is your strategy in the region?
Clearly we do not have all the assets over the Mideast that we would like. But we have brought satellites there for specific purposes in the past, and we are active there in selling third-party capacity today — C- and Ku-band, L-band and, with Astrium Services, X-band; we are involved in selling across most of the frequencies. We continue to look at possible hosted-payload opportunities, and we have proved ourselves capable of responding to opportunities.
You purchased IS-25 at auction in late 2009 for $210 million, moved it to 328.5 degrees east (31.5 degrees west) and started selling capacity in April, with Africa a principal market. Do you still like your investment?
Yes, we’re still quite happy with our investment. IS-25 is starting to build momentum. We had to overcome the arrival of a lot of fiber in the region recently, but we certainly remain happy with the purchase.
Inmarsat just announced a $1.2 billion investment in Ka-band capacity for mobile broadband links. You mentioned ViaSat and Hughes as competitors, and both are staking their futures on Ka-band for fixed consumer broadband. Have you missed the Ka-band boat?
The Inmarsat investment certainly makes sense for them as they are exclusively narrowband today. We have a fleet today in Ku-band that offers near-global coverage, and we are augmenting that with IS-27, which we recently ordered. You can debate the pros and cons of Ka-band versus Ku-band in the maritime environment. We feel Ku-band is superior, especially for broader beams, as it is easier to close the link budget. In our case, we are not transitioning from narrowband to broadband. What we are doing is expanding our Ku-band capacity for government and other use worldwide.
SES and Eutelsat are also investing in Ka-band, though in different markets.
SES invested in O3b Networks to generate growth in emerging markets. In our view, they used O3b as a vehicle for this. There are technical questions about the O3b constellation that remain to be answered from our point of view. As for Eutelsat, their Ka-band project is a single satellite. We tend to look at everything we do from a fleet perspective.
You mentioned the IS-27 satellite, recently ordered from Boeing. You are adding a UHF payload to that in the hope that the U.S. Defense Department will purchase the capacity. How do you evaluate the risks there?
The current generation of UFO [UHF Follow-On] satellites is aging and the satellites are past their design lives. The next generation, MUOS [Mobile User Objective System], is behind schedule. All the research we have done, on our own and with the Defense Department, which is a current customer, says demand will far outstrip supply. We made sure our UHF payload on IS-27 is compatible with what the defense customer is using.
Look at what happened with our IS-22 satellite, with a UHF payload being built for the Australian Defence Force. We sold them only a part of the payload, and they subsequently came back and purchased the rest. We are very comfortable we will get a good return on our investment.
But you in fact have no commitments for the IS-27 UHF payload?
It is not committed by the U.S. Navy. But we would never have done this if we had not met with members of the Defense Department on multiple occasions to gauge their interest. Having committed backlog is preferable, but we feel the demand is clear enough and we think the customer will appreciate the flexibility we are demonstrating in our approach. Believe me, we did not just jump into this.
Government customers represented 18 percent of your second-quarter revenue. Do you see this customer set increasing to 25 percent in the coming years?
It’s certainly outgrowing the rest of the business, and we think the use of commercial satellites by defense customers will continue, and grow. It presents them with a different mindset compared to military satellite procurements, which are often over budget and delayed.
You recently won the CBSP contract with the U.S. Navy, which is an indefinite-delivery, indefinite-quantity contract valued at up to $542 million over five years. Given current budget pressures, how likely are you to reach that figure?
We are now fully engaged in this program. The delays are behind us, and the protest was resolved in our favor. There have been some cutbacks to the program as far as this year’s revenue is concerned. But the good news is that this is a great contracting vehicle for many government departments.
If your question is, did we make our bid only on the assumption that it would reach the maximum revenue? The answer is, of course not. It’s a very creative bid combining our own and third-party capacity.
That third-party capacity is mainly bandwidth provided by SES, Sky Perfect JSAT and Astrium Services, correct?
That’s right, and there is a somewhat lower profit margin on that, but it is margin with no capital expense required. We provide engineering services on the third-party capacity as part of the overall offering. And in the meantime we are augmenting our own Ku-band capacity to provide a one-stop shop for our Defense Department customer.
Your Galaxy 15 satellite, uncontrolled but with its C-band payload still active, has been drifting eastward since April, forcing you and owners of satellites in its path — notably SES — to perform orbital gymnastics. Are there any lessons to be drawn from this experience?
This was a situation that was unprecedented in the industry. We have ensured that the three other Orbital Sciences satellites we have on order will include greater resilience as far as being able to send commands to the satellite, and will also include a back-door command capability. We are testing these modifications now.
It certainly teaches the lesson that you can never be complacent in this industry, and that backup systems don’t always work.
Has it caused you to re-evaluate your policy of not insuring your satellites beyond their first year in orbit?
It’s true that in-orbit insurance rates, and satellite insurance rates in general, have come down recently. But we think our in-orbit backup strategy is the right one for us, rather than taking out insurance.