Satellite operator PanAmSat is expanding into Mexico’s value-added solutions market with an equity investment in Pegaso Banda Ancha, a satellite broadband service provider based in Mexico City, PanAmSat officials said.

PanAmSat of Wilton, Conn., has a pre-existing relationship with Pegaso Banda Ancha’s parent company, private-equity investment firm Grupo Pegaso. In 2000, PanAmSat and Grupo Pegaso, which holds interests in a wide variety of Latin American and U.S. media operations, formed PanAmSat de Mexico, which sells satellite capacity in the Mexican market.

“We’re growing our relationship by making an investment in their company,” said Arturo Ballesteros, director of PanAmSat de Mexico. “We basically evolved our relationship from [Pegaso Banda Ancha’s satellite provider] to a joint venture where we can also provide value-added services.”

Ballesteros declined to quantify PanAmSat’s investment in Pegaso Banda Ancha, which leases capacity from PanAmSat de Mexico for its broadband solutions business. He said PanAmSat, which is slated to merge this year with global satellite operator Intelsat, will benefit from its investment as Pegaso Banda Ancha expands further in Mexico and in other Latin American markets.

Formed in 2005, Pegaso Banda Ancha draws most of its revenues from a contract with the Mexican government to link some 32,000 elementary-school classrooms throughout the country to the Internet via satellite. The program is called Enciclomedia.

The value of the initial Enciclomedia contracts total $28 million, according to Javier Braun Burillo, general director of Pegaso Banda Ancha. The company is pursuing follow-on contracts, expected to be awarded this summer, to provide similar connectivity to 50,000 secondary-school classrooms, he said. PanAmSat’s investment will strengthen Pegaso Banda Ancha’s competitive position for those contracts, which are expected to range in value from $10 million to $15 million, Braun Burillo said.

While the Enciclomedia program dominates Pegaso Banda Ancha’s current business portfolio, the company also boasts small business clients and users in rural areas. “By the end of the year we have plans to increase our customer base on other projects, so I think Enciclomedia will represent about 50 percent of our business by the end of 2006,” Braun Burillo said.

Economic problems and overcapacity have conspired to make the Latin American market a difficult one for satellite operators in recent years.

“It’s well known in the industry that perhaps the most difficult year for the Latin American market was 2003,” said Carmen Gonzlez-Sanfeliu, vice president of Latin American operations for PanAmSat. “However, I think in the past three years, you’ve seen very much in the way of opportunities.”

Nevertheless, the regional capacity glut will grow substantially with the launch of Satelites Mexicanos’ large Satmex-6 satellite later this year. Satelites Mexicanos of Mexico City is minority owned by PanAmSat competitor Loral Space and Communications of New York.

Ballestros said investing in a solutions provider like Pegaso Banda Ancha helps PanAmSat differentiate itself from its competitors and avoid sole reliance on leasing satellite transponder capacity. The strategy, he said, makes sense with or without Satmex-6.

Peter Nesgos, a partner specializing in satellite financing with the law firm Milbank, Tweed, Hadley & McCloy LLP of New York, said PanAmSat has a strong presence in Mexico and would not necessarily invest in Pegaso Banda Ancha as a hedge against the flood of capacity that Satmex-6 could bring. “There is a significant opportunity foreseen in investments that relate to content and applications, not just distribution, so this may be a good entry in to that market,” he said.