london — Mobile satellite services operator Inmarsat’s option to purchase its largest distributor, Stratos Global, will remove a potential obstacle to Inmarsat as it seeks to overhaul its multi year distributor agreement in 2009 and exercise more control over its sales channels, Inmarsat and industry officials said.
In particular, the purchase option alters the correlation of forces between Inmarsat and Apax Partners, which through two purchases of Inmarsat distributors had positioned itself, with Stratos Global, as an obstacle in Inmarsat’s path to that control, these officials said.
Private-equity investor Apax, which has purchased France Telecom Mobile Satellite Communications and is in the process of buying Telenor Satellite Services of Norway, will account for nearly 40 percent of Inmarsat’s global revenues once the Telenor acquisition is completed. Stratos makes up 46 percent. A Stratos-Apax alliance — or even a possible purchase of Stratos by Apax, would have made it more difficult for Inmarsat to redraw its distribution contract, called a Commercial Framework Agreement, when it comes up for renewal in April 2009.
The transaction apparently does not prevent Apax or some other investor from making a counter-bid for Stratos between now and the date of a Stratos shareholders vote.
Rupert Pearce, Inmarsat’s chief counsel, dismissed such a possibility. Pearce said in a March 19 conference call that an Apax purchase of Stratos would leave more than 80 percent of Inmarsat’s revenue stream in the hands of one company.
“That would pose significant questions [to anti-trust regulators], especially in Canada and the United States,” Pearce said. “It would be prima facie anti-competitive horizontal integration, versus our bid, which offers increased efficiency gains to customers.”
Tim Farrar, president of Telecom, Media and Finance Associates, a California-based consultancy, said Inmarsat’s ultimate goal of owning most of its distribution chain also could pose questions for regulators, especially since Stratos and other Inmarsat distributors also distribute products from satellite-telephone operator Iridium, a direct Inmarsat competitor.
“It is not hard to see why Stratos would have an incentive to favor Inmarsat services” starting now, even if Inmarsat does not have formal ownership of the company, Farrar said in a March 20 research note.
London-based Inmarsat and Bethesda, Md.-based Stratos Global announced March 19 that they had reached an agreement on a deal that, in legal terms, will keep Stratos independent from Inmarsat until April 2009.
Inmarsat will provide up to $250 million to a Canadian investment vehicle, CIP Canada Investments Inc., to purchase Stratos for $576 million, including the assumption of Stratos’ debt. The sales price for Stratos, which is traded on the Toronto Stock Exchange, is equivalent to 6.40 Canadian dollars ($5.44) per share.
Stratos Chief Executive Jim Parm, in a March 19 conference call, said the deal represents a 7 percent premium compared to where Stratos’ stock was trading on March 8, the day before rumors of an impending sale caused the stock to climb — and a 25 percent premium over the previous three months’ average stock price.
Stratos, whose purchase of rival Xantic closed in February 2006, reported 2006 revenues of $537.8 million and an EBITDA, or earnings before interest, taxes, depreciation and amortization, of $74.4 million. The purchase price by Inmarsat, through CIP Canada, thus represents a multiple of 7.7 times Stratos’ 2006 EBITDA, which Parm said is higher than the multiple of 6.5 times that Apax has agreed to pay for Telenor Satellite Services.
Apax and its France Telecom Mobile Satellite Communications expect the Telenor sale to close this spring. France Telecom Mobile did not respond to requests for comment on whether the Inmarsat move on Stratos will modify those plans.
Inmarsat’s investment in CIP Canada will be in the form of a loan that provides an option to purchase CIP Canada’ corporate parent, CIP UK, after Inmarsat’s Commercial Framework Agreement with its distributors expires in April 2009. Among other constraints on Inmarsat, the current agreement with distributors forbids an Inmarsat purchase of a distributor.
The Inmarsat loan’s interest rate of 5.75 percent doubles to 11.5 percent if the purchase option is not exercised. Inmarsat has agreed to pay $750,000-$1 million to CIP.
In their March 19 conference call, Inmarsat officials stressed that Stratos would remain an independent entity placed into a Canadian trust. They insisted that no decision has been made as to an eventual Stratos purchase.
“This is an option we have taken,” Inmarsat Chief Executive Andy Sukawaty said. “It is not a given that we will necessarily exercise it.”
At the Mobile Satellite 2007 conference here March 20, Inmarsat investment advisors and others familiar with the terms of the arrangement nonetheless said there is no serious doubt about Inmarsat’s intention to exercise the option.
“I personally do not think anyone else was about to make a bid for Stratos,” one investment banker said. “But other private-equity houses had been looking at the company and this posed a risk to Inmarsat. This deal eliminates that risk at a reasonable price.”