ITSO Questions Intelsat’s Commitment to Public Service

Intelsat’s proposed $3.2 billion purchase of PanAmSat appears to have encountered no resistance anywhere — except within Intelsat’s own walls.

Officials in the intergovernmental organization, whose role was preserved when Intelsat was privatized in 2001, fear Intelsat already is slipping away from its public-service obligations as it adapts to the rough-and-tumble challenges of a competitive business environment.

The organization — called ITSO, or International Telecommunications Satellite Organization, Intelsat Ltd.’s previous name — also is concerned that the PanAmSat acquisition will increase the risk that Intelsat will have to file for bankruptcy in a market downturn, which in turn would threaten Intelsat’s ability to meet its obligations to poor nations.

ITSO Director-General Ahmed Toumi has written to U.S. Federal Communications Commission (FCC) Chairman Kevin J. Martin to urge the FCC to set conditions on the PanAmSat acquisition that would “ensure the survivability of Intelsat’s Public Service Obligations, and … preserve the integrity of the Common Heritage orbital positions and associated frequency spectrum” in the event of an Intelsat bankruptcy.

Intelsat’s total debt, now about $4.8 billion, will increase to more than $11 billion following the PanAmSat acquisition — a development that ITSO says raises the risk of bankruptcy in the event of a market decline.

ITSO has hired a Washington law firm to craft proposals for the FCC to consider inserting into its ruling to approve the PanAmSat purchase. Intelsat Chief Executive Officer Dave McGlade said in an April 19 conference call with investors that final U.S. regulatory approval of the merger is expected by mid year.

Dianne J. VanBeber, Intelsat’s vice president for investor relations, said April 20 that Intelsat is aware of ITSO’s concerns and has no intention of abandoning its obligations to provide below-market connectivity to nations that need it.

Intelsat’s Lifeline Connectivity Obligation permits nations that meet certain criteria to benefit from satellite links at favorable prices. It is one of the conditions Intelsat agreed to accept in return for privatization in 2001.

Under the terms of Intelsat’s privatization, which was agreed to by the governments and companies that owned Intelsat, ITSO will exist at least until 2013 to assure Intelsat meets its public-service obligations, as will the company’s obligations to provide Lifeline Connectivity links.

For a company now owned by private-equity investors and required to meet debt covenants and to compete with three dozen other satellite operators worldwide, the Lifeline Connectivity obligation is a ball and chain Intelsat’s competitors do not have to deal with.

In an April 17 filing to the U.S. Securities and Exchange Commission, Intelsat said that 9 percent of its $3.8 billion in backlog consists of Lifeline Connectivity contracts. Another 20 percent of backlog is made up of what Intelsat calls “Most Favored Customer” or MFC contracts that also restrict the company’s ability to price services at market rates. The MFC obligation terminates in July — five years after privatization.

In addition to its pricing policy, Intelsat is bound by its obligation to continue to provide “global connectivity and coverage” and “non-discriminatory access to the Intelsat system” under the terms of its privatization agreement.

But in his March 23 letter to the FCC, Toumi said that since January 2005, Intelsat’s new owners have whittled away at these obligations and “decreased satellite coverage in several sensitive regions, including Asia and Africa.”

Intelsat in early 2005 lost a satellite over Asia following a sudden on-board technical failure, and many of these customers have since migrated to Intelsat’s competitor New Skies Satellites of The Hague, Netherlands — a company that was spun off from Intelsat and later purchased by Intelsat’s principal competitor, SES Global of Luxembourg.

Intelsat’s SEC filing says that as of Dec. 31, 2005, 21 percent of the company’s backlog is for services in the Middle East and Africa, and 11 percent for business based in the Asia-Pacific region.

VanBeber said Africa is a growth area for Intelsat, and that the company has no intention of quitting the region.

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