DirecTV Latin America Expects Savings from Front-loaded Sat Lease

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PARIS — DirecTV Latin America (DTVLA) is paying satellite fleet operator Intelsat about $400 million between 2011 and 2014, and then smaller lease charges over the next 15 years, to secure access to capacity on two large satellites for its growing business, DTVLA President Bruce Churchill said March 29.

Agreeing to make substantial upfront payments before the satellites are built is saving DTVLA about $100 million, in today’s dollars, over what it would spend if it had proceeded with a standard bandwidth lease arrangement that began once the two satellites are in orbit, Churchill said.

“We invested in new satellites for PanAmericana,” Churchill told investors in a March 29 conference, which was web-cast. “It’s about $100 million a year that started last year and that goes this year and then two more years.

“We did a very simple NPV [net present value] calculation. We negotiated a deal with Intelsat where we would put more money up front in return for fewer lease payments at the back end. On a NPV basis we probably saved ourselves $100 million. Given that opportunity, I would probably choose for that kind of investment again.”

Luxembourg- and Washington-based Intelsat in September ordered two large telecommunications satellites from Space Systems/Loral of Palo Alto, Calif., to be launched in 2014 and 2015. The two spacecraft have a combined 144 Ku-band transponders, and all of them will be leased by DTVLA for the satellites’ full 15-year service lives.

The two satellites will also carry a combined 20 C-band transponders that Intelsat will use for its own business.

Industry officials estimated that the transaction is costing Intelsat more than $500 million for the construction, launch and insurance of the two satellites, and will generate more than $1 billion in revenue for Intelsat during the satellites’ service lives.

El Segundo, Calif.-based DirecTV, the biggest U.S. satellite television broadcaster, is investing heavily in its fast-growing Latin American operation. DTVLA includes the 100 percent-owned PanAmericana, which serves nine nations in South America, and 93 percent-owned Sky Brasil businesses, and Sky Mexico, in which DirecTV has a 41 percent ownership stake.

Churchill said PanAmericana and Sky Brasil, which today generate a combined $5 billion in annual revenue from 8 million subscribers, is well-positioned to double both its subscriber count and its revenue by 2017.

Sky Mexico, which for DirecTV generates $1 billion in annual revenue and counts 4 million subscribers, is not included in the company’s five-year forecast. When the Mexican business is included, the Latin American business now has some 12 million subscribers, up 45 percent since late 2010.

Without disclosing numbers, Churchill said DTVLA’s performance in the first three months of 2012 has been even better than expected. For the moment, he said, the company is sticking with its previous forecast that 2012 revenue would increase 20 percent over 2011 with a 12 percent increase in subscribers.

To capture this growth, DTVLA is investing about $1.6 billion in 2012. Some 55 percent of that will go toward acquiring new subscribers. Another 25 percent of that spending will be for retaining existing subscribers and upgrading them to higher-end satellite television packages.

About 2 percent will go toward DTVLA’s fledgling wireless broadband business, which employs terrestrial microwave towers to deliver broadband to residential customers.

Unlike its principal U.S. competitor, Dish Network and EchoStar of Englewood, Colo., which has said it views satellite broadband as having high potential in Brazil and elsewhere in Latin America, DTVLA apparently has no plans to add a broadband satellite to its fleet.

DTVLA expects that 8 percent of its capital spending in the coming years will be on new satellites. Total spending will drop to $1.4 billion per year starting in 2013.

Churchill insisted that the subscriber growth will not come at the expense of profitability. Measured by the return on invested capital, DTVLA’s 21 percent return is not far behind its larger U.S. sister company’s return of 25 percent in 2011. Dish Network’s return on invested capital in 2011 was 30 percent, down from 38 percent in 2010, according to DTVLA figures.

DirecTV Chief Executive Mike White said DTVLA in 2011 accounted for 19 percent of the company’s total revenue but 24 percent of its profit, not counting the Dish Mexico operation. In 2012, White said, DTVLA will account for 40 percent of the company’s revenue and profit growth.

Sky Mexico is facing stiff competition from Dish Mexico, which entered the market in 2009 with what Sky Mexico General Manager Alex Penna said was a commercial offer that disrupted what had been a “pretty cozy” market situation. “That changed the industry’s price points,” Penna said of the Dish Mexico subscriber offer of $11 per month.

Sky Mexico responded with VeTV at $13 per month. Penna said the company surpassed 4 million subscribers in 2011 and at the end of the year had a 32 percent market share, with Dish Mexico and cable operator Megacable each taking a 17 percent share.