In the early days of the satellite industry the investors were principally government telecommunication agencies (known in the industry as telcos) and, more marginally, the satellite manufacturers. Now, financial investors dominate the ownership ranks of the industry as a result of three periods of change in the shareholding structure of the satellite operators:
– Privatization of the international government organizations — Eutelsat, Inmarsat and Intelsat — in 2000 and 2001, and the exit of most large telcos from the satellite business;
– Leveraged buyout acquisitions of five large companies from 2003 to 2004: Inmarsat, Eutelsat, PanAmSat, Intelsat and New Skies Satellites. Fixed satellite services companies and mobile satellite services companies are attractive for buyout firms because they have predictable cash flows.
– Initial public stock offerings (IPOs) in 2005 of PanAmSat, New Skies Satellites and Inmarsat, with Eutelsat expected soon. Proceeds of the IPOs will go to pay a dividend to the owners who used leveraged buyouts to acquire these companies, to pay down their debt and to pay for operations.
Simultaneously with privatization, the industry has been consolidating to benefit from economies of scale in satellite fleet management and procurement and from larger capital market access. Industry consolidation has been shaped by three main events: the acquisition of GE Americom by the SES Group for $4.3 billion in 2001; the acquisition of Loral Skynet’s North American satellites by Intelsat for $961 million in March 2004; and now the move in August by Intelsat to acquire PanAmSat for $3.2 billion.
As a result of mergers and acquisitions, the fixed satellite services industry has been concentrating to the point where three companies, Intelsat/PanAmSat, SES Global and Eutelsat, now hold 60 percent of the market.
The Fixed Satellite Services industry experienced considerable growth in the 1990s with annual growth rates of almost 10 percent in both revenue and in transponder demand. The decade saw the take-off of satellite television broadcasting services all around the world and of the Asian telecommunications and television markets.
The golden age of the industry ended in 2001 with the telecom crisis, when revenue decreased while transponder demand growth rate strongly decelerated.
Industry revenue resumed growing in 2003. With $7.05 billion in 2004, growth was even stronger but mainly as a result of the still-weak U.S. dollar. At constant exchange rates of the various national currencies, revenues in the fixed satellite services industry would have increased by less than 1 percent in 2004.
Europe continues to be the largest market for fixed satellite services revenue if not in volume, with revenues of $2 billion in 2004 driven by premium prices for the video broadcasting services of SES Astra and Eutelsat.
Asia remains a difficult market as is the case for all regional operators but Optus of Australia.
The fixed satellite services industry is a structurally profitable business as costs and expenses are largely fixed , providing the operators with the ability to generate significant incremental revenues without the same incremental costs once the satellites are launched.
However, profitability margins started to erode in 2001, and the erosion accelerated in 2004 as a result of two factors: The first was exceptional operating expenses for the largest operators due to satellite losses (PAS-6 and IA-7) and leveraged buyout transactions.
The second factor in the erosion of profit margins was the start of a change in the business model of the industry as the percentage of revenue generated by network service grew. It was an important change because network service commands a lower margin as measured by EBITDA (earnings before interest, taxes, depreciation and amortization) than traditional transponder lease activity.
To illustrate, three large companies (Intelsat, PanAmSat and SES Americom) enlarged their service solutions capabilities in recent years by creating dedicated business units (Intelsat General Corp., G2 Satellite Solutions Corp. and Americom Government Services Inc., respectively) that increasingly contribute to revenue growth, but decreased EBITDA. In 2004, the average margins in the industry stood at 60 percent for EBITDA, 21 percent for operating profit and 14 percent for net profit.
Predictability of future revenue is a strength of the fixed satellite services industry.
However, over the past six years, future sales guaranteed by contract have decreased with regard to current sales. The minimum multiple of backlog to sales decreased from four to two between 1998 and 2004, and the maximum decreased from eight to six.
The range illustrates the difference in the customer mix of the operators. Broadcasters typically contract for long periods (contracts for 10 years or the lifetime of a satellite are not uncommon). For companies specializing in data services and occasional video services, contracts tend to be short in duration, if not in volume, thus reducing the backlog.
It is thus not a surprise that PanAmSat, which historically had the industry’s highest backlog multiple, is also the No. 1 operator in number of TV channels broadcast by satellite, on par with Eutelsat. At the end of 2004 the amount of PanAmSat backlog derived from video services was 82 percent. Similarly, SES Astra, a pure player for satellite video broadcasting in Europe, always has maintained a high backlog multiple.
By way of contrast, operators more focused on the voice and data business have lower multiples.
The capital expenditure to sales ratio is a relative measure of the investment effort of the fixed satellite services industry. In the mid-1990s, when the operators launched numerous heavy satellites for the booming TV and Asian markets, capital expenditures represented on average 70 percent of industry sales. The capex effort decelerated in the late 1990s when the largest operators cut their expenditures and plunged in 2003 to 29 percent, as all operators but three (Binariang, Shin Satellite and Star One) significantly reduced their satellite investment.
The entry of private-equity funds into the capitalization of the large fixed satellite service operators in 2004 has not fundamentally changed the procurement cycle, as it had already entered into a downturn in 2002. With an average of nine satellites ordered per year during the past three years, the fixed satellite services industry is in a low period in its investment cycle with limited new projects. The exceptions were SES Americom with Americom2Home, and Hispasat with Amazonas.
Rachel Villain is director for Space & Communications, Euroconsult, Paris. All information is derived from the 2005 Edition of Euroconsult’s World Satellite Communications & Broadcasting Market, Ten-Year Outlook.