In 2002 many of Wall Street’s biggest investment-banking firms reduced or eliminated their coverage of the satellite industry. The long-expected proliferation of stock offerings was not occurring , the industry’s growth was stagnating and some of the promising business areas had flopped as investment opportunities.
But acting on an old investment maxim — buy to the sound of cannons, sell to the sound of trumpets — Hoyt Davidson and his partner, J. Armand Musey, chose that moment to start a satellite-focused investment bank, Near Earth LLC. Davidson had led Credit Suisse First Boston’s satellite group, and Musey had a similar post at Salomon Smith Barney.
Davidson and Musey say their early hunch that the satellite sector would continue to need specialized financial expertise for deals too small to attract the major investment houses seems to have paid off. The company focuses on private-equity investments and mergers and acquisitions in the range of $2 million to $50 million.
With a board of advisors featuring well-known veterans of the satellite industry, Near Earth “is seeing loads of deals” that play to the company’s expertise, Musey says. The company is involved in a half-dozen transactions now, but did not want to name them.
Davidson and Musey talked to Space News staff writer Peter B. de Selding.
Recent deals involving PanAmSat, SES Global and Eutelsat suggest equity markets are now giving higher values to satellite-fleet operators. What has changed?
Davidson: Part of it is the aura of credibility companies get when well-known private-equity firms invest in them. This has happened with satellite operators. Some very savvy investors have put several hundred million dollars into these companies. Private-equity owners are great change agents.
Musey: You also have the fact that the change in ownership of some big satellite operators has increased the likelihood that this industry will finally start to consolidate — a development that most people agree should happen but has not happened — in part because of the profiles of the previous shareholders. The landscape seems more attractive now.
But the industry is no longer growing at double-digit rates, and everyone still talks about overcapacity. Shouldn’t this lower valuations rather than raise them?
Davidson: Overcapacity remains; there doesn’t need to be this number of operators. But these companies historically have had high credit quality and very low debt, which was necessary to support the high capital expenditures needed. Now we are in a period where this high level of capital expenditure is not needed, so these are great companies to lever up with low-cost debt. Equity can be returned to investors, and future returns on equity can be increased from the low single digits of recent times.
PanAmSat’s planned stock offering features a high quarterly dividend yield. If Intelsat or Inmarsat had done that, would their at tempted stock offerings have worked?
Musey: It’s hard to resist saying, ‘We told you so.’ We think it’s absolutely right to offer a substantial dividend given the current state of the industry. If you don’t have the big growth story, you ought to be offering shareholders a credible dividend. In the interest of full disclosure, we should say we are small shareholders in Intelsat.
Davidson: Intelsat could have gone public with a big enough dividend, but the company had so much shareholder overhang it would have been difficult to structure a lockup period [governing major shareholders’ rights to sell shares] to deal with that.
You obviously think it is great news that private equity has purchased some of the biggest satellite-fleet operators. Is there a possible downside?
Davidson: It’s good news because it will force through some needed changes in these companies. But there is the possibility that if the market for satellite services goes down, highly leveraged companies might encounter problems.
Some in the industry say that private equity ownership will mean a short-term business outlook and a refusal to invest for the future. Is that a legitimate concern?
Davidson: Not necessarily. Private equity took over Sirius Satellite Radio, and the new owners certainly have not lacked for aggressiveness in investing in Howard Stern [a well-known radio personality] and in major-league sports programming. They are investing because they see a demand there. If the owners of some of these other satellite companies saw a big demand potential, they would spend the money necessary.
Is the U.S. market big enough to support two satellite radio companies?
Musey: We think two is exactly the right number. It’s also likely that the satellite radio business model will be adapted in Europe and Latin America, and possibly Asia, too, once the success in the United States is demonstrated.
Mobile broadband via satellite is a future growth area cited by many in the industry. Do you share the optimism?
Davidson: This sector looks to be favored by some big U.S. government programs focusing on wireless networks for homeland security, and this may be the agent that sets this market off and running once these contracts are awarded.
Fixed satellite broadband for the consumer market has had its troubles getting a sustainable market foothold. WildBlue Communications is about to debut its system in the United States. How do you rate its chances?
Musey: WildBlue’s arrangement with the National Rural Telecommunication Cooperative makes a lot of sense in the way it motivates people to sell the WildBlue service. An eventual WildBlue link to customers through a WiFi or WiMAX [extended WiFi] connection also looks like it could be attractive for areas without DSL [Digital Subscriber Lines] or cable options, especially if it is bundled with a DirecTV or EchoStar television package.
Many people who have signed up for DirecTV and EchoStar have had a cable option available to them. WildBlue customers have no other option.