Intelsat CEO Dismisses Cartel Claim, Credits Added Value for $543M Deal

by




WASHINGTON — Intelsat Chief Executive David McGlade sought to defend his company against allegations that it had established a cartel with fellow satellite-fleet operators Sky Perfect JSat Corp. of Japan, SES of Luxembourg and Paradigm Secure Communications of Britain to lock up a U.S. Navy satellite-services contract potentially worth over $500 million.

The award of the Commercial Broadband Satellite Program (CBSP) contract to Intelsat General, whose team included the other operators, is now under protest by several of the losing bidders. The other competitors for the contract included Artel Inc. of Reston, Va.; CapRock Communications of Fairfax, Va.; Globecomm Systems of Hauppauge, N.Y.; and Segovia Inc. of Herndon, Va., which is now owned by mobile satellite services provider Inmarsat of London.

The indefinite-delivery, indefinite-quantity contract, valued at up to $542.7 million over five years, is to provide the U.S. Navy with broadband links in the C-, Ku- and X-band portions of the radio spectrum.

The competition featured Intelsat and the other satellite-fleet operators proposing their own satellite capacity as part of the Intelsat General bid, while offering the same capacity to the other bidders.

The U.S. Defense Department has long used intermediaries to purchase satellite capacity but is moving toward accepting direct bids from satellite owners, a policy shift that would place in jeopardy the business models of the intermediary companies, often referred to as “integrators.”

In a March 15 interview, McGlade dismissed the protests as a rear-guard action by companies seeking to maintain a role that their principal customer no longer needs. He specifically said Intelsat created firewalls to insulate the Intelsat General CBSP bid from Intelsat’s other sales teams, who were free to offer Intelsat satellite capacity to the competing bidders.

“We treat this kind of thing very seriously, and we have a long record of being able to separate bids inside the organization so that one doesn’t benefit more than another,” McGlade said. “In this case, our team put a coalition together and delivered value to the Navy. You’re measured on a whole lot of criteria, it’s not just raw transponder capacity. The world is changing, and if you don’t add value you won’t be around for long.”

CapRock Communications Chief Executive Peter Shaper, during a panel discussion at the Satellite 2010 conference here, said CapRock has doubts about how its bid was judged against Intelsat General’s.

“We get limited information” about the competing bids, Shaper said March 15. But the information CapRock did receive suggests that the evaluation process was marred by “inconsistencies and irregularities. We want more information on how the decision was made,” Shaper said. He added that, for CapRock, the Intelsat General bid featured “anti-competitive practices.”

Much of the CBSP capacity will be used by the Navy to replace lower-speed L-band satellite links provided by Inmarsat.

Inmarsat Chief Executive Andrew Sukawaty, whose recently purchased Segovia Inc. unit is among the protesting companies, said March 17 at the conference that the Intelsat CBSP team members are “unnatural bedfellows that had to be put together for this bid.” Sukawaty said the CBSP program is unlikely to have a net long-term negative financial consequence for Inmarsat.

“Our yield on a per-minute basis from the U.S. Navy has gotten lower and lower and doesn’t bring us that much revenue,” Sukawaty said. “It’s clear that none of them [the Intelsat General team members] can provide on their own the corridors of coverage that the Navy wants.”

Inmarsat’s purchase of Segovia came after the CBSP bids were submitted but before the winner was announced and before the protests were lodged.

Inmarsat formally has no opinion on the validity of the protests and is not pushing Segovia one way or another, in keeping with the terms of the acquisition, Inmarsat Chief Financial Officer Rick Medlock said March 15.

Medlock said the Segovia purchase, for $110 million in cash, is a so-called earn-out agreement under which Inmarsat pays a fixed price at the acquisition’s close and then an additional sum based on the company’s performance over a set period. In Segovia’s case, the earn-out period is three years, during which Inmarsat has little control over how Segovia manages its business.

Medlock said Segovia increased its revenue from nearly $60 million in 2008 to around $80 million in 2009 and is expected to grow by 15 percent annually over the next couple of years. “It’s their decision” to protest the CBSP award, Medlock said.

McGlade said that in Intelsat General’s CBSP bid, the three fixed satellite services providers are expected to divide about equally the C- and Ku-band services to the Navy. But because the contract is an indefinite-delivery, indefinite-quantity arrangement, it is difficult to determine how much of each fleet operator’s capacity the Navy will want, and when. Paradigm, which owns and operates Britain’s Skynet military communications satellites and has the right to commercialize the capacity, will have exclusive charge of the X-band portion of the contract.

Two industry officials said it is not certain the Navy will be able to exercise the contract’s full value given the pressures on its budget. “They do not have the full authorization for $542 million yet,” said one official.