Intelsat Bats Down Rumors of Satellite Sell Off
PARIS — Satellite fleet operator Intelsat on Sept. 29 sought to dismiss rumors it was trying to sell a portion of its existing fleet to reduce debt, saying its 50-plus satellites and associated ground infrastructure constitute a tightly bound network that cannot easily be broken up.
Speaking at an investor conference organized by Deutsche Bank, Intelsat Chief Financial Officer Michael McDonnell did not address industry scuttlebutt that the company was looking to dispose of its North American fleet in a multi-billion-dollar transaction beyond acknowledging its existence and refusing further comment.
But McDonnell’s remarks did suggest that such a deal would not make any sense even if it resulted in sufficient proceeds to materially reduce its debt.
“We consider our satellite fleet to be really a network in that you have crossover in terms of different customer traffic on the majority of our satellites,” McDonnell said. “Some are solely dedicated to one customer or one customer set, but for the most part it is an integrated network that’s supported by an integrated terrestrial network as well. We don’t really have any assets that we consider to be non-core.”
Luxembourg- and McLean, Virginia-based Intelsat’s debt stands at $14.75 billion — nearly eight times its adjusted annual EBITDA, or earnings before interest, taxes, deprecation and amortization, carrying an average 6.35 percent interest rate. It has no debt maturities until 2018, but about $4.6 billion comes due in 2019.
Intelsat stock, traded on the New York Stock Exchange, has suffered in recent months. Market capitalization recently has been around $750 million.
Like several other satellite fleet operators, Intelsat is building high-throughput satellites offering per-megabit pricing at far lower cost to customers than is done on conventional satellites. The new markets thus reachable will more than make up for the lower cost per megabit.
The first of Intelsat’s high-throughput Epic satellites is scheduled for launch aboard a European Ariane 5 rocket in mid-2016. The satellite, called Intelsat 29e, has the equivalent of 270 transponders and is targeting aeronautical and mobility markets, among others.
McDonnell said Intelsat already has a 73-percent share of today’s aeronautical satellite communications market, and a 40-percent share of the maritime market. Both are growing fast and should reduce the net effect of any cannibalization of its current business by the lower-price Epic satellites, McDonnell said. Similarly, the higher cost of Epic satellites, both for the satellites themselves and their associated ground network, will be offset by the fact that they can replace the equivalent of two or three conventional satellites.
Intelsat announced early on in the procurement of Intelsat 29e that it had booked nearly $500 million in backlog from three customers, equivalent to about 20 percent of the satellite’s capacity for the duration of the leases.
But McDonnell cautioned that high-throughput satellites like Epic are unlikely to fill to the 70-80 percent levels of conventional spacecraft. Expect more like 40-60 percent, he said. “When you’ve got 270 transponders, it comes down to a question of, 40 percent of what?”
Intelsat has made extensive use of customer prepayments for some of its satellites, taking immediate cash to offset the capital spending on satellite construction and launch but foregoing the larger sum of money that would have come in the form of annual bandwidth-lease payments.
McDonnell said the company has used prepayments only in circumstances where a customer is heavily invested in a satellite, often through contract commitments for the asset’s full 15-year life.
“The logic of the prepayment is that as you go into the factory with a single customer subscribing for the entire satellite, it aligns your interests. You’ve got skin in the game on both sides and you can work collaboratively” before the satellite is launched, he said. “But you don’t get the same amount that you would get over time, and it does create cashless EBITDA going forward. Our cashless EBITDA at this point is at very manageable levels. We don’t want to go too high.”
Intelsat’s government business, meaning mainly the U.S. Defense Department, has fallen since 2012 with U.S. budget freezes and troop withdrawals from Afghanistan and Iraq and is expected to fall again this year. The company has told investors that the business is at least stabilizing, if not returning to growth in the near term.
McDonnell did not address, and was not asked about in the conference’s open session, the possible effect on Intelsat’s government division of the recent loss of a five-year U.S. Navy contract potentially worth $450 million.
Intelsat was the incumbent supplier on the contract, which since awarded in 2010 never generated anywhere near its stated potential value of $543 million. Intelsat nonetheless has protested the award, to an affiliate of satellite fleet operator Inmarsat of London.