With WildBlue Acquisition, ViaSat Doubles Bet on Satellite Broadband

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PARIS — ViaSat Inc.’s purchase of consumer satellite broadband provider and partner WildBlue Communications offers a lesson for service providers: If you refuse to buy the hardware, the hardware may decide to buy you.

After its late-2007 decision to spend nearly $400 million to build its own broadband satellite, ViaSat, with the WildBlue transaction, has now doubled its bet that satellite broadband in North America has a huge potential that WildBlue and its direct competitor, Hughes Network Systems, have only begun to harvest.

Hughes’ HughesNet and WildBlue together have less than 900,000 subscribers. ViaSat Chief Executive Mark Dankberg, in an Oct. 1 interview, said WildBlue alone should be able to count 1.5 million subscribers or more in 2014 using its current satellites plus the ViaSat-1 spacecraft scheduled for launch in early 2011.

Assuming he is correct, and that Hughes and WildBlue each retains about 50 percent of the market, there will be at least 3 million satellite consumer-broadband subscribers in 2014.

ViaSat of Carlsbad, Calif., has been supplying Denver-based WildBlue with consumer satellite broadband terminals for nearly a decade. But the two partners appeared on a collision course when ViaSat, frustrated that WildBlue was not racing to deploy additional satellite capacity to meet surging demand, ordered ViaSat-1 on its own.

ViaSat told its skeptical shareholders that the all-Ka-band ViaSat-1 would aim vast amounts of bandwidth at exactly those regions in the United States where WildBlue’s satellite beams were sold out. In addition, ViaSat has positioned ViaSat-1 as offering substantial Ka-band capacity to the U.S. military for training missions involving manned and unmanned aircraft.

ViaSat-1, under construction at Space Systems/Loral in Palo Alto, Calif., will offer a more than tenfold increase in bandwidth over WildBlue’s current capacity, and 20 times more capacity in those areas in the United States where WildBlue has seen the highest demand.

Dankberg said an August ruling by the U.S. Federal Communications Commission that modified the ViaSat-1 operating license means that the satellite will actually have a throughput of 130 gigabits per second, 30 percent more than its original capacity. He said ViaSat had anticipated this regulatory decision in setting the ViaSat-1 specifications, and that the higher capacity will not entail any modifications to the satellite’s design.

WildBlue and ViaSat have been working to squeeze extra capacity out of the current WildBlue space segment — the Loral-built WildBlue-1 satellite, plus most of the Ka-band capacity on Canada-based Telesat’s Anik F2 spacecraft. But WildBlue nonetheless has been forced on occasion to refuse new subscriptions in certain regions because its satellite beams pointed there were sold out. WildBlue has leased Ka-band capacity from EchoStar Corp. aboard that company’s AMC-15 satellite to increase capacity starting in late 2009.

One of WildBlue’s problems has been that its customers have increasingly selected the higher-end subscription packages, which further increases the demands on WildBlue’s satellite.

For Dankberg, who never appears at a conference without quoting the latest Cisco Systems Internet traffic report, this was all too predictable. “People want to make the broadband story complicated, but it’s really very simple,” he said in the interview. “It’s about bandwidth, bandwidth and bandwidth.”

Hughes Network Systems of Germantown, Md., reaching the same demand-forecast conclusions as ViaSat, has ordered its own large all-Ka-band satellite, called Jupiter, which is scheduled for launch in 2012. Hughes already operates the Ka-band Spaceway 3 satellite.

ViaSat is purchasing Denver-based WildBlue for $443 million in cash and $125 million in ViaSat stock, for a total purchase price of $568 million plus an estimated $27 million in transaction expenses.

ViaSat estimates that when the deal closes by next March, WildBlue will have around $75 million in cash, and that ViaSat will be able to contribute an additional $55 million in cash for the purchase.

Subtracting the cash and the stock distribution, ViaSat will need to raise about $340 million in new debt to finance the transaction.

It will also need to persuade its investors that what was once a sideline enterprise designed to assure future satellite-terminal sales has suddenly become a full-blown services business.

Dankberg argues that the WildBlue purchase means the ViaSat-1 project no longer needs to develop, from scratch, its own distribution, billing and customer-service networks. In addition, WildBlue revenue will help offset the development costs of ViaSat-1, and WildBlue’s expanding business will help fill ViaSat-1 more quickly.

It also means ViaSat, which had not been able to find a strategic partner for ViaSat-1, is now under less pressure to do so.

“One of the important characteristics we were looking for in a strategic partner was a distribution channel,” Dankberg said. “With WildBlue, the project has a more robust capital structure and we benefit from the WildBlue cash flow.”

ViaSat officials conceded in an Oct. 1 conference call with investors that transferring WildBlue customers to the ViaSat-1 satellite will entail a repointing of subscribers’ rooftop antennas and replacement of some of their hardware if they want to benefit from ViaSat-1’s higher speeds.

This is among the challenges that ViaSat will need to address as it takes on a new business.

“We think the real question is, ‘What kind of ViaSat is this?’” investment analyst Collins Stewart said in an Oct. 2 report. “ViaSat for many years has been an equipment company. … [T]here are good reasons why equipment companies and service companies aren’t housed under the same roof. … [E]quipment companies can lock the service company into a certain architecture, and become unwilling to try … new technologies that will impact the service.”

WildBlue reported 2008 revenue of $187 million and EBITDA, or earnings before interest, taxes, depreciation and amortization, of $44 million. The company has said it expects 2009 revenue to be $210 million, with EBITDA climbing to $85 million.

In their joint announcement of the acquisition Oct. 1, ViaSat and WildBlue said WildBlue’s expected cash flow is sufficient to more than cover the costs of the transaction, and also will help finance ViaSat-1’s development. They said WildBlue generated $52 million in free cash flow for the 12 months ending June 30.