Last week's news of the plans of U.K.-based private equity firm BC Partners to purchase with other investors a majority stake in Intelsat Ltd. for $5.03 billion looks to prove both expensive and instructive in the industry. Yet while the price has been confirmed, the lesson remains hazy.
The definitive agreement calls for a BC Partners-led group to acquire approximately 76 percent of the primary ownership of Intelsat Holdings, with existing stakeholders in the company retaining approximately 24 percent.
Combining the company's equity with what was estimated as $11.40 billion of debt as of March 31, the overall value of the transaction would run to approximately $16.43 billion. The involved parties expect the deal to close within six to nine months, pending regulatory approvals.
Unconfirmed competing bids were reportedly entertained from other private equity groups as well as Loral Space and Communications, plus a joint bid by Liberty Media and EchoStar Communications.
Intelsat operates 51 satellites that distribute video programming for broadcast networks and cable companies. The company last changed hands in 2004, when a private equity consortium consisting of Apax Partners, Apollo Management, Madison Dearborn Partners and Permira Advisors bought it for $515 million in cash.
Last year, Intelsat acquired PanAmSat for $3.2 billion plus another $3.2 billion in assumed debt, partly financed by a $2.9 billion high-yield debt offering.
In 2006, Intelsat reported revenues of nearly $1.7 billion, with a nearly $500 million increase year-on-year (almost all contributed by the PanAmSat assets); operating income of about $400 million; and a net loss of $369 million.
Upon word of the price of the company fetching nearly tenfold that which it sold for three years earlier, Fitch Ratings responded by considering Intelsat as a Rating Watch Negative. As of June 20, the company held a "B2" corporate family rating from Moody's, an evaluation five steps below investment grade.
Phil Spector, Intelsat's general counsel and executive vice president of business development, was equanimous about those assessments, saying "this kind of change was widely anticipated. I think you'll find that any bond rating company will respond [conservatively], if only to take a breath and look into a company's taking on more debt. It was very much expected."
Spector professed his optimism, saying "from a strategic standpoint, I think it's very positive for a few reasons. The price paid validates our thesis that the purchase of PanAmSat would accrete, and the combined value with our successful integration is reflected in the price the buyers were willing to pay. It shows we made the right decisions."
He also said that BC Partners approached the purchase with due diligence "at a very deep level," before arriving at their appreciation of the business.
"We obviously would not have allowed Intelsat to take on the debt - and they would not have been willing to - if we didn't think that we had the cash flows to support it."
In a statement, Raymond Svider, a managing partner of BC Partners, justified the purchase by saying "Intelsat and the FSS sector are in the midst of a cycle of strong performance. Intelsat is the premier FSS satellite operator, with high-quality assets and a strong global brand. Its valuable cable and direct-to-home neighborhoods, strength in network applications, blue chip customer base and solid backlog of long-term contracts create an attractive investment opportunity. We look forward to working with and supporting Intelsat's management team as they pursue their growth strategies."
Spector said that skeptics had been proven wrong before, and that BC Partners' offer "gains more credibility from the fact that we were right last time. When the private equity investors agreed to pay [in 2004], they said it was too much debt to take on, and then when we merged with PanAmSat with even more debt they said it was too much to take on. They were wrong."
He added that Intelsat was "the number one leader" in the industry, with an enviable track record over the past few years.
"We have a very successful business strategy in place," Spector said. "We're building seven new satellites at the moment, which must be something like a record in the FSS market, and we continue to be optimistic and bullish."
Industry analyst Max Engel of Frost & Sullivan was less so. "It's funny," he said. "As the three major players I heard about, [BC Partners] had the most money but the least reason. If EchoStar got it, you see how it goes with their business. If Loral got it, it'd be ironic since they sold some [assets] off to them. But the satellite companies didn't have enough money to play."
Engel suggested "I don't see a huge out-of-nowhere demand for satellite. If [they] know it's coming before anyone else, that's worth it. But I don't see it ... Short of shrinking the satellite fleet size to save [operating and replacement] money, I don't see much of a way to squeeze profit out of it."
Engel questioned why the bidders who could use the satellite assets "either didn't consider it worth the money or couldn't afford it. I can't say whether they thought it was worth it, but I still find it funny that the ones who could use [Intelsat's assets] didn't get it, and the one who looks at it as a purely financial transaction got it."
He warned "if you value a business by what people will pay, that's a different model than valuing what the industry will produce. That's where we got the Internet bubble."