Stratos Global, the biggest distributor of mobile satellite services, defended the terms of its purchase of rival Xantic Corp. in a conference call with financial analysts and urged them not to make hasty conclusions based on a comparison with Apax Partners’ purchase of France Telecom’s mobile satellite business.
Stratos officials also said the recent creation of a subsidiary to deal exclusively with the U.S. government will help the company substantially increase its share of the large market for U.S. government purchases of commercial satellite services.
According to Bethesda, Md.-based Stratos Global Corp. the U.S. government currently purchases about $1 billion per year in commercial satellite services, a third of which is in the market Stratos currently serves. Stratos Chief Executive Jim Parm said the company has a 25-percent share of its addressable market now, a figure that would translate to about $83 million annually. However, the creation of Stratos Government Services Inc., which was announced in July, could allow Stratos to potentially double that market share as the company broadens the portfolio of services it offers to U.S. government clients, Parm said.
In a July 26 conference call with financial analysts, Parm and Stratos Chief Financial Officer Alfred Giammarino said the company’s financial performance in 2006 has been hurt by the continued drop in U.S. government — especially military — use of high-speed land-mobile satellite services.
Stratos and other companies in the mobile-satellite sector have warned that the spike in business following the U.S.-led invasion of Iraq in 2003 likely would not last as military users either left the area or transitioned to more-permanent fixed communications lines. While it lasts, this business is among the most profitable in Stratos’ portfolio, Giammarino said.
Giammarino said U.S. government use of high-speed land-mobile satellite communications services has dropped by about 30 percent since the first half of 2005. The loss of this business has been responsible for three-quarters of the decline in Stratos’ gross margins, he said.
And the decline may not be over. “It’s hard to say that it’s stabilized,” Giammarino said of U.S. military and other government sales. “It moves up and down.”
Stratos reported revenues of $258.6 million for the first six months of 2006 and a net loss of $2.9 million for the period.
Revenues increased by 40 percent compared to the same period a year earlier, mainly because of the addition of Xantic’s business to the Stratos portfolio. Stratos purchased Xantic in February 2006 for $195 million and could owe up to $20 million more depending on how Xantic performs this year.
Stratos said revenues were flat year-on-year when the pro-forma sales of Stratos and Xantic are compared with the results so far in 2006.
Stratos shares, which already had been drifting downward on the Toronto Stock Exchange since the beginning of the year, fell more than 30 percent on publication of the results.
Some investors have compared the Stratos-Xantic deal with private-equity investor Apax Partners’ July 24 purchase of France Telecom Mobile Satellite Communications for 60 million euros ($76.6 million). The France Telecom mobile satellite business reported sales of 165 million euros in 2005. Comparing the two transactions on the basis of price-to-sales, or price-to-gross profit, it looks like Stratos overpaid for Xantic.
But Parm said that comparison is flawed , pointing out that Stratos is wringing synergies from the sale that will result in savings of $25 million to $30 million per year starting in late 2007. He noted for contrast that, as a financial investor and not a strategic buyer, Apax will realize almost no synergies from its purchase of the France Telecom business.
In addition, the purchase of Xantic makes Stratos by far the largest distributor of services from London-based Inmarsat, Parm said. The combined Stratos-Xantic now has a 46.8-percent share of the market for Inmarsat services.
In announcing its sale to Apax, Paris-based France Telecom Mobile Satellite Communications said it had a 20-percent share of the global market for mobile satellite services, including both Inmarsat and satellite-telephone providers Thuraya of Abu Dhabi andSatellite LLC of the United States.
Industry officials said France Telecom’s share of the Inmarsat business is around 14 percent.
“There are significant differences between the two assets,” Parm said of Xantic and France Telecom’s mobile satellite division. “Xantic has higher margins. It’s true we paid 8.5 times EBITDA [earnings before interest, taxes, depreciation and amortization] but we got $25 million in annual EBITDA synergies.”
Another advantage a strategic buyer like Stratos has over Apax is in Inmarsat discounts. Inmarsat, a wholesale distributor of satellite capacity, grants discounts to its 30-odd distributors worldwide when they reach certain sales volumes each year.
As a bigger company, the combined Stratos-Xantic will reach its volume-discount milestone earlier than the two companies would have if they remained separate.
Parm said Stratos does not need to grow further to reach the advantages of size, but he suggested that other Inmarsat service providers will need to consolidate for the same reasons that drove Stratos to buy Xantic.
Telenor Satellite Services of Norway and Telstra of Australia are Stratos competitors that, like Apax’s recently acquired France Telecom mobile satellite business , each have less than 30 percent of the Inmarsat business.