As Market Rebounds, PanAmSat Keeps Focus on Partnerships, Small Satellites

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Officials with PanAmSat Corp. said the market for Ku-band satellite capacity worldwide is rebounding strongly after several flat years, with the United States, the Middle East and Africa providing near-term opportunities for investment in new capacity.

But in keeping with the company’s long-established policy, PanAmSat’s principal response to the surging demand will not be to build new satellites of its own. Instead, the company will form partnerships with other operators, and take advantage of the expected sale of existing satellites by smaller satellite-fleet operators who no longer can compete.

In an Aug. 9 conference call with financial analysts, Wilton, Conn.-based PanAmSat Holding Corp., the world’s third-largest satellite-fleet operator in terms of revenues, said its core business of providing satellite capacity for video transmissions in the United States is growing faster than expected.

“The market for Ku-band in the United States is much stronger than many of us had anticipated,” PanAmSat Chief Executive Joe Wright said. The market’s strength is one reason PanAmSat entered into a joint venture with satellite-fleet operator JSAT Corp. of Tokyo to build a satellite covering the United States. In return for a 50-percent share of the satellite at a PanAmSat orbital position, JSAT is financing the satellite’s construction and launch, with PanAmSat reimbursing JSAT after the launch through revenues from the joint venture, called Horizons.

Growth also is strong in the Middle East and Africa. Wright said Ku-band capacity provided by PanAmSat and other operators covering these areas is 80 percent full. Demand in this region is what drove PanAmSat to purchase the EuropeStar operation owned by Alcatel Space of Paris in a deal that is scheduled to close in August.

The main assets PanAmSat picked up in the EuropeStar purchase are two orbital positions and an operating satellite with an expected 10 years of life still remaining. Among the customers brought to PanAmSat with the EuropeStar venture are three of the four licensed VSAT — or very small aperture terminal — satellite service companies in Saudi Arabia, Wright said.

PanAmSat’s payments to Alcatel for EuropeStar are contingent on the continued healthy operation of the Alcatel-built EuropeStar-1 satellite, according to PanAmSat.

Wright has made cutting capital and operating expenses a guiding principle since he arrived at PanAmSat four years ago. Since then, operating expenses have been cut by 40 percent, and PanAmSat has purchased satellites only to replace capacity. The satellites it has purchased have included several smaller, less-expensive spacecraft built by Orbital Sciences Corp. of Dulles, Va.

“These are perfect PanAmSat strategic transactions,” Wright said of the JSAT and EuropeStar deals. “You don’t need to buy big new satellites when there is a 40 percent overcapacity in our industry.”

Wright said that while the four largest companies in the fixed satellite services business — SES Global, Intelsat, PanAmSat and Eutelsat — have fleet-occupancy rates averaging 75 percent or more, many smaller operators with one or two satellites post fill rates no higher than 50 percent.

Wright said that as regulatory reform spreads around the world, these companies’ owners will be looking to sell their assets.

“These are going to be very good transactions going forward,” Wright said. “It’s a great opportunity for the larger fleets to pick up capacity that had low utilization, and it’s immediately accretive,” he said, meaning immediately profitable for a company like PanAmSat.

James B. Frownfelter, PanAmSat’s chief operating officer, said PanAmSat is urging other satellite manufacturers to enter the smaller end of the business, which is dominated by Orbital Sciences, to “improve the competitive dynamics in the industry for launching these types of satellites.”

As of June 30, PanAmSat had five satellites on order, not including the JSAT-purchased Horizons spacecraft. Two of them — both Orbital Sciences-built — are scheduled for launch by September. The capital expenditures associated with these satellites that had not been paid as of June 30 totaled $222.4 million, PanAmSat said in an Aug. 9 filing to the U.S. Securities and Exchange Commission (SEC).

In July, PanAmSat signed a contract with Orbital Sciences for construction of the PAS-11 satellite, to launch in early 2007. That contract added $97.6 million to PanAmSat’s future capital expenditures, according to the SEC filing.

PanAmSat reported revenues of $422.7 million for the first six months of 2005, a 2.5 percent increase over the same period in 2004. Adjusted EBITDA, or earnings before interest, taxes, depreciation and amortization — a common financial measure among satellite operators — was $330.4 million for the period, a 6.9 percent increase.

Wright said that in the past four years, PanAmSat’s cost-cutting has improved EBITDA margins to 76 percent from 66 percent. The company’s fleet-wide fill rate as of June 30 was 75 percent, unchanged from earlier in the year.