EchoStar Says Satmex Acquisition Far from Done Deal

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DUBAI, United Arab Emirates — EchoStar’s proposed purchase of Mexican satellite fleet operator Satmex is “far from being a foregone conclusion” because of Satmex bondholder resistance and constraints that EchoStar has placed on Satmex as a condition of the deal, according to EchoStar officials and documents filed March 1 by the companies.

The transaction could prove to be crucial for both satellite operators insofar as both are in need of resources to increase their satellite capacity in an industry that values scale.

Englewood, Colo.-based EchoStar and Satmex’s management need to convince Satmex’s bondholders that accepting less than they had expected for their Satmex debt is their best available option. Satmex, since going through bankruptcy reorganization in 2005, has been struggling for several years to fund what company management has said is an indispensable new satellite.

EchoStar’s future without Satmex is also an issue. The company’s principal owner, Charlie Ergen, in recent months has openly questioned whether EchoStar, which was split off from satellite-television provider Dish Network in January 2008, will be able to find its place as a provider of satellite transponder capacity in a North American market that, for some applications, seems locked up by Intelsat, SES World Skies and Telesat.

In a March 1 conference call with investors, Ergen repeated that the purchase of Satmex “gives us some scale to be in the business. We needed some scale or we needed to look at other alternatives.”

Ergen referred to the proposed purchase as “a highly risky deal. … It’s in the top 10 percent of risky deals we’ve done.”

Dean Olmstead, president of EchoStar Satellite, the EchoStar division assigned to build the company’s satellite business in the Americas and Asia, said EchoStar “will work over the next 15 days to persuade” Satmex bondholders to approve the arrangement. “We’re still in a rather uncertain period,” Olmstead said, saying bondholder approval “is far from being a foregone conclusion.”

In addition to providing increased orbital heft for EchoStar, a Satmex acquisition would give the combined company five orbital slots with a good view of the Americas at 113, 115 and 117 degrees west, where Satmex has slots, and at 119 and 121 degrees west, where EchoStar has orbital positions.

Olmstead said having five slots spaced evenly over the Americas “is really unprecedented. And the market growth in Latin America is two or three times that of the United States.”

Olmstead said EchoStar, despite its small fleet and relatively small revenue base outside its principal customer, Dish Network, “already [has] the industry-leading EBITDA,” or earnings before interest, taxes, depreciation and amortization. The company does not publish its EBITDA figures.

EchoStar reported March 1 that its non-Dish satellite-lease revenue in 2009 rose by 18 percent, to $52.8 million. EchoStar is offering to pay $267 million in cash for Satmex, plus whatever amount of the company’s current $107 million cash reserve remains after transaction-related expenses.

In a March 1 filing with the U.S. Securities and Exchange Commission (SEC), Satmex said its current bonds have a combined principal of $424.5 million.

Ergen and Olmstead said the deal is also a stretch for EchoStar because Satmex needs to build and launch, within less than three years, a replacement for the Satmex 5 satellite, whose xenon-ion propulsion system failed in January. Satmex has estimated that Satmex 5 has enough backup chemical fuel to operate for less than three years.

Maintaining customers on the nearly fully booked Satmex 5 is a high priority for EchoStar. The company has given Satmex until March 16 to sign a preliminary Authorization to Proceed with a manufacturer to build a replacement for Satmex 5, or until April 27 to sign a manufacturing contract, according to Satmex’s SEC filing.

Satmex bondholders will need to approve any financial payment for Satmex 5. Their refusal to permit Satmex to build a Satmex 7 satellite despite Satmex management requests has been one reason why Satmex now finds itself in a delicate position.

Satmex’s current fleet is made up of three satellites. In addition to Satmex 5, its other chief source of revenue is Satmex 6, which was launched in 2006 and is healthy in orbit. Solidaridad 2, launched in 1994, has been in inclined orbit — meaning that, to save fuel and extend its life, it no longer is stabilized on its north-south axis — since 2008. In its SEC filing, Satmex said it is looking to sell or lease Solidaridad 2.

Olmstead said the Satmex 5 propulsion failure occurred in the middle of EchoStar-Satmex negotiations, increasing the risk in purchasing Satmex. A Satmex 5 replacement, he said, could be expected to cost around $300 million for the satellite’s construction, launch and first year of insurance. The Satmex 5 issue, he said, “is reflected in the price.”

Ergen suggested EchoStar could walk away from the deal without much hesitation. He said EchoStar was unwilling to pay “one cent more” for Satmex given that it will be EchoStar that pays for the Satmex 5 replacement.

EchoStar and MVS Comunicaciones, a large media conglomerate in Mexico and EchoStar’s partner in the Dish Mexico direct-to-home satellite television service, will create a joint venture to own Satmex. EchoStar did not disclose what its intended ownership stake would be, but Ergen said it is likely to be majority-owned in Mexico for voting-rights purposes, while EchoStar likely will have a majority economic stake.