The global satellite industry is in the midst of one of the largest capital spending binges in its history, building and launching new spacecraft to replace fleets that have been in orbit since the 1990s and earlier. But when the fleet is replaced in a few years, how will global satellite operators continue to spend their healthy cash flows? To be honest, no one is quite sure.
Chief financial officers of four leading satellite operators who spoke during Euroconsult’s World Satellite Business Week generally confirmed that after the current fleet replacement cycle, capital needs should significantly decrease after 2012/2013, making large free-cash flows available for both investments in new projects, possible acquisitions, debt repayment or even stock repurchase. Mobile satellite operator Inmarsat has already moved in one of these directions with the announcement of its new $1.2 billion Ka-band constellation to provide high-capacity broadband throughout the globe by 2014. Going in a different direction, FSS operator Eutelsat said recently it will, among other initiatives, increase its shareholder dividend, a move that often pushes up a stock price.
Spending excess cash flow on acquisitions could be problematic because of the limited number of targets. Montreal-based Telesat has been mentioned, but beyond that mid-sized operator, most of what remains are small regional companies with just one or two satellites each. The bankruptcy sale of ProtoStar this year demonstrated that large operators are willing to pay top dollar for single satellites that can fit into their fleets. That may have been a special case, because both of ProtoStar’s satellites were new, which is not always true of the spacecraft operated by many regional players.
Paying down debt is certainly an option, especially for highly leveraged Intelsat. The company currently has over $15 billion in debt, put on the books over the years through a series of leveraged buyouts. Although de-leveraging seems high on the list, Intelsat’s CFO reiterated that it will continue to look at investment opportunities that make sense. An IPO could also help reduce the debt burden as well as give Intelsat’s private-equity owners an exit door.
The top five satellite operators — Intelsat, Eutelsat, SES, Telesat and Hughes — in 2009 had an average EBITDA margin of around 68% and together generated over $750 million in free-cash flow, an amount that could nearly double after 2013. One concern raised by some at the conference is that after the current capex cycle, too much cash chasing too few opportunities could lead to riskier investment decisions. CFOs and investors will need to be equally cautious.
Richard Roithner is Senior Consultant at Euroconsult in Paris specializing in the strategic analysis of satellite operators and service providers. He is expert in the assessment of the business models of satellite operators and involved in commercial due diligence and business planning for Euroconsult clients. Richard is a graduate of the University of Economics & Business Administration in Vienna, Austria, holding a Master of International Business Administration with a specialization in International Strategic Marketing and Management Accounting.
