SES Plans To Invest Its Cash in New Satellite Businesses

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PARIS – SES Global is positioning itself as a company that will not use the current decline in its capital-expenditure cycle and the rise in free cash flow to give shareholders a near-term reward. Instead, the company plans to invest its money in new businesses.

Company officials conceded that this is not without risk. SES Global’s investment in the Satlynx consumer-broadband venture with Gilat Satellite Networks and Alcatel Space has not produced the expected revenues, and SES announced Feb. 21 that it is taking a charge of 19 million euros ($25 million) against its 40 percent Satlynx investment.

Satlynx will be repositioned to address the corporate market for satellite broadband service .

The company also announced that it had written down the value of its investment in the Orbcomm satellite-messaging service by 6.7 million euros. That move comes only a year after the company made the initial investment for a 10 percent stake in Orbcomm, whose first-generation constellation of satellites is still in orbit.

SES’s decision to purchase the Verestar satellite-services business for $24 million in a Chapter 11 bankruptcy auction in early 2004 was made on the assumption that Verestar’s government-services contracts in the United States would quickly become a $100 million annual business.

But taking Verestar out of bankruptcy took longer than expected, and resulted in lost sales as some U.S. government customers withheld business pending the company’s emergence from bankruptcy. That did not occur until late in 2004.

Despite those experiences SES is still looking for opportunities in the lower-margin satellite services sector as well as in its core satellite-infrastructure business, SES Chairman Romain Bausch said.

Recent examples include the 20 percent investment in Ciel Satellite Communications Inc., a Canadian start-up that in September won rights to Canada’s 129 degrees west longitude orbital slot for broadcast services. Initial satellite service by this company from an interim satellite must start by August under the terms of the Canadian government license, and a contract for a new satellite for the slot must be signed by July 2006, with a launch by December 2008.

SES Global’s SES Americom subsidiary is also a minority shareholder in QuetzSat, a new Mexican company that earlier this month won rights to Mexico’s 77 degrees west longitude orbital slot.

In addition, SES has decided to complete construction of the AMC-18 satellite, being built by Lockheed Martin, to inaugurate a third orbital slot for U.S. direct-broadcast television transmissions. The satellite had been viewed as a ground spare.

Bausch pointed to these initiatives as an example of what SES’s principal competitors — most now owned by private-equity investors — will not be able to do given their financial commitments.

New Skies Satellites of The Hague, Netherlands, and PanAmSat Corp. of Wilton, Conn., are planning initial stock offerings this spring and have promised to pay shareholders hefty dividends despite their high debt levels. Intelsat Ltd. of Washington, Eutelsat S.A. of Paris and mobile satellite-services operator Inmarsat Ltd. of London also are evaluating possible stock-market listings.

While none of these companies has publicly specified its annual dividend payments, Bausch said his understanding is that they will be in the range of 6-8 percent.

Bausch said some of these companies are selling satellite capacity at rates even lower than the cost of depreciation of the satellites, adding to pricing pressure especially in Asia and Latin America. “These [private-equity] shareholders are desperate to generate cash,” Bausch said, saying they were boxed in by their guarantees of a high dividend on the one hand and their high debt on another.

“Personally I would say that is very good news for SES Global,” Bausch said. “You really take the growth potential out, you are taking the substance out of the company” by paying out so much cash in dividends while serving high debt loads. “What’s really happening in our industry is that the industrial substance is being taken out and turned into short-term profit.”