A series of events on the road to the long-awaited consolidation of mobile satellite services (MSS) operators shows that those attempting mergers and acquisitions have much to fear from the regulatory authorities.
After failing to reach an agreement in July with Inmarsat, Harbinger Capital Partners, the U.S.-based hedge fund manager, struck an odd deal with SkyTerra, owners of Mobile Satellite Ventures (MSV), in which it already owns a substantial number of shares. It was a deal that goes something like this: We will give you money to stay afloat for a couple years and we’ll go through the regulatory hoops of a takeover of Inmarsat together, and only after we get approval, will we make an offer to buy out Inmarsat.
The same organizations that dragged their feet on the recent XM-Sirius merger appear to be the only ones capable of swinging the axe over the first major deal expected in the MSS business.
If an outfit wants to buy a company and combine it with another to manage sizeable portions of a particular part of the spectrum and lots of government contracts, it may have to first go through the legal hoops and only then make an offer to buy.
We could call the new paradigm the XM-Sirius merger syndrome. In February 2007, both satellite radio operators indicated they wanted to merge in a reported $13 billion deal only to see the approval take regulators more than 17 months to approve. After this exasperatingly long process, the companies finally merged to form a company with a combined market capitalization of about $2 billion.
When looking at the puzzle of the XM-Sirius deal, one is baffled by the length and complications that this newborn baby had to face. In recent years, the satellite market has seen a wave of consolidation among fixed satellite services (FSS) operators worth billions of dollars each – Intelsat and PanAmSat, Loral Skynet and Telesat, and SES Global and NewSkies. Of course, these all pale in comparison to other much larger and more swiftly approved telecom deals such as Sprint-Nextel, AT&T-BellSouth and Cingular-Verizon.
The proponents of the XM-Sirius merger noted in support of their case that convergence of media put them squarely in the larger media distribution market, not just in the digital satellite radio niche. It is true that both satellite radio companies offered complementary and supplemental services, such as weather, traffic, data and video, and that this newly formed company changes the landscape. Its combination also opens the door to a flurry of potential cross-platform mergers in which satellites are tied to various types of players (telephony with direct-to-home satellite, cable with mobile satellite television, etc.). But one has to wonder what took the authorities so long to see that?
If the market has evolved, why is it that public regulatory bodies that are at the heart of many current and future spectrum allocations aimed at boosting next-generation services across a variety of platforms are not able to come up to speed on a small niche market merger? The XM-Sirius union probably extended the reach of the authorities in their consideration for approval but gave the uncanny impression that business comes second after regulations.
The MSS market is at the crux of converging with wireless and terrestrial solutions, offering new products that integrate Global Systems for Mobile communications, Global Navigation Satellite Systems and multiband roaming capabilities for voice, data and video products. As it shifts into high gear in North America with MSS operators authorized to use an Ancillary Terrestrial Component (ATC), consolidation seems inevitable – or some will face struggles that will remind many of the turn of the century bankruptcies.
Northern Sky Research (NSR) stated early in 2008 that for consolidation in this industry to happen “the impetus … may come about, as it has in the past for the fixed satellite services (FSS) industry by some hedging from the financial community.” Harbinger, which since 2006 has raked up quite a few shares in the satellite business through Hughes Network Systems, Terrestar Networks, SkyTerra/MSV and Inmarsat, among others, is probably the kingpin in the mergers and acquisitions that need to happen in the MSS industry. But as the new environment demands, Harbinger may have figured it needed to review its copy, do its homework and understand that in some markets, Inmarsat, a non-U.S. company, basically has the reins. And that instead of a straight purchase for Inmarsat, it needed to go about it the other way around.
For that, Harbinger secured SkyTerra/MSV, a U.S.-based satellite operator, to use for the takeover, thus softening the U.S. authorities and laying to rest foreign takeover fears, while putting on the table enough money to help MSV meet all the milestones to keep its MSS-ATC license. This in effect gets the mobile operator over the expected 18-month approval process and positions the company for a takeover offer.
The fact that Inmarsat has many government contracts in the United States may have further tipped the scale in favor of this cautious approach, and the future acquisition by Inmarsat of one of its main distributors, Stratos Global, certainly gave Harbinger more food for thought. Stratos also sells Iridium, Globalstar, Hughes and MSV products and services and reportedly earns more than $100 million in U.S. government business a year, with more than $200 million in the overall U.S. market last year.
But to the casual observer, the merger process here is still upside-down. Harbinger obviously fears the U.S. Federal Communications Commission more than Inmarsat’s board of directors and shareholders. It is almost certain that Harbinger’s business forces it to focus on getting its hands on valuable spectrum assets managed by a combined Inmarsat and SkyTerra/MSV to sell in a few years time.
What is then the risk of the new acquisition process on this first of many expected consolidation deals for mobile satellite players? Harbinger, as with any purchase, is aiming at paying a lower price for the� remainingInmarsat shares it does not already own – about 71 percent – while reaping valuable U.S. spectrum. However, if current trends hold in the market, the market capitalization for Inmarsat is likely to rise in the meantime. Its stock price has gained almost 50 percent in the last two years, and its long-term share price indicators point to a slow but upward trend, barring any satellite launch failure or unforeseen event.
This merger could then turn out to be more expensive than making the offer today at a set price and overcoming the hurdles afterwards. Open speculation as to when an offer will be made and at what price could drive the share price up, especially if the fundamentals of the business remain and the markets expectation with its new services are realized.
long-term share price indicators have been on a downward trend for the last two years, and even the lighter debt load of a financially constrained MSV and cash-flow positive Inmarsat will still carry the burden of the unproven mass market expected from Skyterra/MSV’s new satellites. Inmarsat is certain to represent a life buoy for SkyTerra/MSV for the future, and this deal presents many opportunities for the operators.
In mid-2007, NSR alluded to this potential benefit in its “Mobile Satellite Services (MSS) 3rd Edition” report, which stated: “This consolidation would give them [SkyTerra/MSV and Inmarsat] the technology and bandwidth needed to attain its [Inmarsat’s] goal in North America without straining resources on its [Inmarsat’s] 4th generation satellites and with the acquisition of ACeS, would enable global satellite handheld coverage with the launch of the I-4 F3 satellite …”
And for Harbinger, this new company’s extended spectrum allocation in the United States becomes the key part of the deal and the main ticket that it will likely try to monetize to prospective partners of the new entity. But the risk of paying more if an offer is made only in 18 months remains.
Perhaps this, for now, is immaterial for Harbinger in the face of surging potential regulatory barriers ahead. Any potential suitor buying an MSS satellite operator with a nice chunk of spectrum has to prepare for a long road ahead. It also has to wait and weather the storm of legal opinions and lobbying from opponents before closing in on the target. The XM-Sirius syndrome basically creates an environment where a more cautious attitude is necessary for mergers in an industry that needs to come together for consumers to reap the benefits of its significant investments.
Claude Rousseau is a senior analyst of satellite communications at Northern Sky Research.