Intelsat, PanAmSat Officials See Clear Sailing for Merger
Intelsat and PanAmSat officials say their proposed merger is unlikely to meet resistance from U.S., European and other regulators who will be asked to review the creation of the world’s biggest fixed satellite services operator, with substantial operations on every continent.
Intelsat Chief Executive David McGlade, who will remain in that position post-merger, said a company review of the regions in which Intelsat and PanAmSat both operate has concluded that none of the 53 satellites — soon to be 54 — owned by the combined company will have to be divested to satisfy antitrust or other regulatory concerns.
“From a regional standpoint, the competition is … more importantly with the fiber companies,” McGlade said in an Aug. 29 conference call with journalists. “We look at them as our main competitor. So we feel we are in a position not to have to divest satellites and we are obviously going to take that position with all the regulatory authorities.”
McGlade and PanAmSat Chief Executive Joseph Wright, who is slated to become chairman of the combined company, repeatedly stressed that regulators should look at the broader telecommunications landscape in evaluating the deal.
A similar argument was made in 2002 by the two dominant U.S. direct broadcast satellite (DBS) television companies, EchoStar and DirecTV, in defense of their proposed merger. The merger was rejected by the U.S. Federal Communications Commission and the U.S. Department of Justice on anti-competitive grounds.
Phillip L. Spector, Intelsat’s general counsel, said Sept. 1 that the EchoStar-DirecTV merger was refused because it would have created a television-broadcast monopoly in rural U.S. areas.
“This is an entirely different situation,” Spector said in an interview. “Back then, cable was losing market share to DBS. Here we have it the other way around — fiber-optic cable has been eating into Intelsat’s market share for years. We are losing market share to cable.”
Spector said Intelsat and PanAmSat “have looked at every market where the combined company would have meaningful capacity, and we don’t think it creates a dominant position anywhere.”
In an Aug. 29 announcement that caught the industry by surprise, Bermuda-headquartered, Washington-based Intelsat Ltd. and PanAmSat Holding Corp. of Wilton, Conn., said Intelsat would purchase PanAmSat for $3.2 billion in cash, equivalent to $25 per PanAmSat share. Intelsat also will assume PanAmSat’s outstanding debt, which also totals about $3.2 billion.
The combined company would have reported $1.87 billion in revenues in 2004, ahead ofGlobal of Luxembourg, currently the world’s biggest commercial satellite-fleet operator, which posted $1.52 billion in revenue last year.
Among the key elements of the merger agreement:
– Intelsat has secured a commitment to finance the full amount of the purchase price from a consortium including Deutsche Bank Securities Inc., Citigroup Global Markets Inc., Credit Suisse First Boston LLC and Lehman Brothers Inc.
In their commitment letter, which Intelsat submitted Aug. 29 to the U.S. Securities and Exchange Commission (SEC), the banks said they have agreed to a total financing package of $3.42 billion, including some $250 million in fees and expenses.
– If PanAmSat backs out of the deal within two months, it owes Intelsat a $64 million termination fee. After that, the fee is $96 million. If Intelsat terminates the agreement following failure to secure financing or regulatory approval, it owes PanAmSat $250 million.
– The new company will use Intelsat’s current headquarters, presumably shutting down PanAmSat’s Wilton, Conn., operations. McGlade and Wright said it was too early to determine the level of savings the new company would realize from work-force cuts , combined satellite operations or other reductions in operating expenses.
– The companies expect the deal to close within six to 12 months following regulatory review. Until closing, or unless the merger is terminated, Intelsat and PanAmSat management are forced to accept restrictions on running their businesses. For example, Intelsat is barred from purchasing any satellite-fleet operator with Ku- or C-band business in North or South America.
PanAmSat’s majority shareholders — private-equity companies Kohlberg Kravis Roberts & Co., The Carlyle Group and Providence Equity Partners Inc. — on Aug. 28 voted their 58 percent stake in favor of the agreement.
Assuming the purchase terms remain unchanged, these three leveraged-buyout specialists will have quadrupled their investment in PanAmSat since they announced their $4.3 billion takeover of the company in April 2004. The PanAmSat purchase was financed mainly with debt, with the sponsors investing about $550 million of their own cash.
Their return from the PanAmSat purchase includes two special dividend payments and PanAmSat’s stock offering in March in addition to their $1.856 billion share of the Intelsat proceeds.
Under the Intelsat-PanAmSat agreement, PanAmSat will continue to pay out a quarterly dividend to shareholders totaling some $47.5 million.
Intelsat has long sought to diversify its business base away from its historic point-to-point carrier and telephony business, which is fast eroding in the face of terrestrial competition, and to enter the video-distribution market. That was the reason for its billion-dollar purchase, in early 2004, of Loral Space and Communications’ Atlantic satellite fleet.
According to PanAmSat and SES Global, the U.S. satellite video distribution market is divided approximately 40 percent each between PanAmSat and SES Global’s SES Americom subsidiary, with Intelsat holding the remaining 20 percent.
Spector said he disputes those figures, and that the U.S. satellite video distribution market is less concentrated than that.
All three major credit rating agencies — Moody’s Investors Service, Standard & Poor’s Ratings Service and Fitch Ratings — warned that they were placing Intelsat on a negative credit watch until more could be learned about the purchase’s reception among regulators and the synergies realized by the combination.
Fitch said it expects regulatory approval to take 12-18 months.
Standard & Poor’s said that given the reported revenues of PanAmSat and Intelsat for the first six months of 2005, the combined company will carry a debt-to-EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) ratio of around 7.5.
Looking at the same data, Moody’s concluded that the merger “significantly increases Intelsat’s pro forma leverage, thereby increasing credit risk for Intelsat debt holders and pressuring the rating downwards.”