The merger of Intelsat and PanAmSat will save the new company about $98 million a year in operating expenses starting in 2008 as the company completes a restructuring that will reduce its work force to 1,000 people from nearly 1,400 today, according to Intelsat Chief Executive David McGlade .
The restructuring will cost about $180 million in severance payments and other charges associated with staff layoffs and site closures. Chief among the latter is PanAmSat’s Wilton, Conn.-based headquarters, which will be closed down as Intelsat consolidates its financial and operational management at the company’s Washington facilities , McGlade said.
Intelsat’s legal headquarters are in Bermuda, but its principal offices are in Washington.
“There were two ways of handling this from the beginning,” McGlade said. “We could do a takeover, or manage it as a merger. I chose the latter. As soon as we announced a jointly led management review, what could have been an adversarial exercise between the two companies became amicable. People understood we were seeking the best personnel for the future company.”
The $6.4 billion merger, which becomes effective July 3, also will permit the merged company to save more than $400 million over the next five years as its forgoes capital expenditures on three satellites that the two companies separately would have purchased.
That means replacements for the Intelsat 707 satellite in the Atlantic Ocean region, the PanAmSat PAS-4 in the Indian Ocean and the PAS-2 in the Pacific Ocean region will now no longer have to be ordered as Intelsat takes advantage of PanAmSat’s 24 existing satellites. The new company will have 51 fully operational satellites when the merger goes into effect.
In addition to those assets, PanAmSat has four satellites on order and Intelsat one, and none of these contracts will be cancel ed, McGlade said in a June 30 interview. Similarly, he said PanAmSat’s Horizons joint venture with JSAT Corp. of Japan will be continued without change.
McGlade said the process of assembling a combined Intelsat-PanAmSat team — “we have literally gone position by position, function by function,” he said — has taken substantial management time. That and the fact Intelsat and PanAmSat were not permitted by U.S. law to enter detailed discussions of fleet rationalization have meant that the company has not determined whether any of its satellites in orbit will be moved.
Intelsat has leased capacity on PanAmSat’s PAS-12 satellite, freeing up capacity on two Intelsat spacecraft over Africa that have steerable beams that now can be pointed elsewhere. The deal was handled as an arm’s-length transaction, McGlade said. He said maneuvers such as this should be feasible in other regions of the world in which Intelsat and PanAmSat satellites have overlapping coverage.
The new Intelsat becomes the world’s largest satellite-fleet operator in terms of revenues — $2 billion a year — and by fleet size. It is also a debt champion. Its pre-existing debt plus what was needed to finance the PanAmSat acquisition have left the company with debt equivalent to more than seven times its $1.6 billion in EBITDA, or earnings before interest, taxes, depreciation and amortization.
The combined Intelsat-PanAmSat backlog was $8.3 billion as of March 31.
Intelsat in mid-June completed a $3.5 billion sale of junk bonds, meaning bonds rated below investment grade by the chief credit-rating agencies.
Intelsat bond investors expressed concern that the company, owned by four private-equity investment firms, would be tempted to use its cash flow to give its owners a large dividend — a move that would pile more debt onto the company.
Intelsat proceeded with just such a move in 2005.
“A shareholder-friendly transaction similar to Intelsat’s special dividend transaction in 2005 would pose a significant threat to bondholders,” the Fitch R atings agency said in a June 15 report on Intelsat’s bond issue.
To assuage these concerns, and to counter the mid-June dip in financial markets, Intelsat was obliged to raise the interest rates offered on its debt, and to accept covenants, or debt-contract terms, that will make it more difficult to provide its current owners with another cash payout.
Intelsat’s current owners are Apax Partners, Apollo Management, MDP Global Investors and Permira Advisors — all well-known leveraged-buyout specialists that are unlikely to retain their current Intelsat ownership stakes for more than a few years.
McGlade said Intelsat has reiterated its commitment not to issue any dividends for at least a year after the PanAmSat transaction unless the company proceeds with an initial stock offering, or IPO.
McGlade said an IPO is on the company’s horizon but is not a near-term priority.
“We don’t need to do an IPO, and while we certainly will consider it at some point, we are pretty relaxed about the idea for now. The focus of this management will be running the new company.”