Five Issues For the Satcom Industry

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PanAmSat’s rough stock-market introduction March 17 may give pause to other satellite-fleet operators eyeing a partial exit from private-equity ownership through initial public stock offerings.

Wilton, Conn.-based PanAmSat was bought just seven months ago by three large private-equity players. They loaded the company with inexpensive debt, then sold still more debt to pay themselves a special dividend before turning to the New York Stock Exchange for a billion-dollar initial public offering, or IPO.

Led by investment underwriters Morgan Stanley, Citigroup and Merrill Lynch, the PanAmSat IPO was supposed to be priced at $19-$21 per share for 50 million shares. The net proceeds of more than $900 million were to pay down the company’s debt and provide its three current owners with another dividend, this one $200 million.

As has been the case with other commercial satellite operators in the past couple of years, PanAmSat’s growth tapered off after the telecommunications sector began a long downturn in the late 1990s, leading to a global glut of satellite capacity and strong downward pressure on prices.

To sell itself to prospective shareholders, PanAmSat is promising to pay a dividend of $1.55 per share, or between 7.4 and 8.1 percent, for the first year of operations following the stock offering.

That apparently was not enough. The company was forced to cut its introductory price to $18 per share and in trading on the New York Stock Exchange March 17-19 the shares appeared to stabilize at around $17.75 per share.

PanAmSat’s IPO was larger than those planned by other satellite operators are likely to be, and debt levels and business prospects differ from company to company. But the PanAmSat experience raises several questions that apply to others, including New Skies Satellites of The Netherlands and Intelsat Ltd. of Washington, that may be planning similar moves:

Debt

How much debt is too much , even in an environment of low interest rates, and even at the low end of a satellite company’s capital-expenditure cycle?

In a March 1 filing to the U.S. Securities and Exchange Commission, PanAmSat makes clear that its debt covenants — the company’s debt after the stock offering will be more than $3 billion — will limit management’s ability to continue to pay out hefty dividends. Those limits could further tighten in an environment of rising interest rates as much of PanAmSat’s debt is on floating-rate terms.

Investment Strategy

Where is the next growth cycle coming from, and how will these companies prepare for it?

PanAmSat and New Skies have both said their debt levels and dividend policies could limit their ability to invest in new businesses. Both point to their young in-orbit fleets and say that’s not a problem in the short term.

SES Global of Luxembourg, the world’s largest commercial satellite operator, however, is taking a completely different approach, by seeding new businesses in Canada, Mexico and the United States.

Similarly, Inmarsat Ltd., the London-based mobile satellite-services operator, is investing $1.5 billion in three new satellites for mobile broadband services despite having an in-orbit fleet that can handle most of today’s opportunities.

The same could be said of DirecTV Group of El Segundo, Calif., which is betting more than $1 billion on satellites to provide high-definition television in the United States despite the many questions that remain about that market .

Consolidation

How will the value of satellite assets owned by private-equity investors be affected by the satellite services consolidation that most industry analysts still say is inevitable?

Several Wall Street analysts have said New Skies, which is owned by the Blackstone Group, is a consolidation play, either as a hunter or as prey. Where New Skies’ owners might find a complementary fit, and whether that fit could be purchased at an attractive price even if interest rates rise, is unclear.

Broadband’s Future

Is satellite broadband a small niche market for satellite-fleet operators, or a business by itself?

WildBlue Communications of Denver plans to roll out its service using Telesat Canada’s Anik F2 satellite late this year, and Telesat Canada is planning its own, separate service in Canada.

EchoStar Communications Corp. of Englewood, Colo., has purchased satellite capacity for the same purpose , but has been undecided for three years and still expresses doubts about the viability of that market. SES Global recently wrote down the value of its Satlynx broadband venture with Alcatel Space and Gilat Satellite Networks, saying the market is much smaller than expected. DirecTV converted its Spaceway Ka-band broadband satellites into high-definition television platforms, and took a massive writedown of its Spaceway assets in the process.

Long-Term Value

How do the interests of the private-equity firms align with those of future shareholders ?

One warning sign for prospective PanAmSat investors is the fact that the company is registered as “controlled” under U.S. securities law, meaning it does not have to abide by certain corporate-governance requirements such as an independent board of directors or an independent compensation committee.

Warren Buffett, chairman of Berkshire Hathaway, recently said he asks managers of Berkshire-owned businesses to act as if they were going to run the business for decades. Are the managers of satellite companies now owned by private-equity firms being given similar freedom?