PanAmSat Looks Across Atlantic Ocean

By | April 24, 2002 | Feature

U.S.-based PanAmSat is looking to expand using its $900 million in cash and available bank credit. And Europe would be a natural arena for that expansion.

The operator, which announced its results on April 12, has spent much of the last 12 months restructuring its balance sheet to reduce costs and now could be set to use some of its financial strengthen to boost its global position. Eric Hugel, a satellite equity analyst at Dresdner Kleinwort Wasserstein, told Interspace, “There are obviously gaps in their global portfolio of satellites. Europe is one of them I would think they might want to look at.”

PanAmSat CEO Joseph Wright pretty much admitted that the company is wrapping up its streamlining program and will look for ways to expand the business. Wright said that PanAmSat “has now one of the largest cash positions in the industry” and that the operator was looking “to pursue alliances in key international markets.”

The goalposts appear to have moved for PanAmSat. The backing of EchoStar is a key here. PanAmSat appears to have the support of Charlie Ergen and this could shape its acquisition strategy going forward. This backing could lead to a far more aggressive expansion policy. PanAmSat has a strong position in the North American market and a developing position in the Latin American market. Europe is clearly the major opportunity for the operator, although at this stage an alliance in this market could still be some way off.

William Kidd, a satellite equity analyst at Lehman Brothers, said in a research note, “Initially, most thought (and probably some still do) that EchoStar’s purchase of PanAmSat was going to be short lived, thinking that EchoStar would want to divest the asset as an out appeared. Whether because EchoStar is truly interested in the business or an out hasn’t appeared, it is increasing looking like that EchoStar will take control of PanAmSat and operate it.”

Armand Musey, a satellite equity analyst Salomon Smith Barney, is less certain of PanAmSat’s role in future consolidation. He said in a research note, “Although we expect PanAmSat to remain a long-term leader in the industry, we doubt that PanAmSat will participate in significant consolidation opportunities. In our view, EchoStar will need PanAmSat’s existing cash flow to fund its broadband and other initiatives going forward.”

Other analysts are also bullish on PanAmSat. The operator appears to have done a good job in reorganizing its balance sheet, said Jim Reynolds, a satellite equity analyst at Ragen MacKenzie. “Their operations were efficient. They reduced costs, which was positive. I also think the business remains healthy, especially through the strong components of the video side of the business, as opposed to the telecoms business, which is weaker. I think there will be good upside when the company increases the utilisation of the fleet. It is operating at 70 percent utilisation, but it is projected too go up over the next few years too perhaps 80 percent.”

Now that its restructuring is done, the operator will have its work cut out to improve profitability. Hugel observed: “EBITDA margin expansion should be driven primarily by improving operational results as the company leases excess transponder capacity. The question is are they going to be able to do that given the current weak market conditions. I think management has done a good job in restructuring the business and getting the costs down.”

PanAmSat had total revenues for the 2002 first quarter of $207.1 million, compared to $205.2 million in the first quarter of 2001. Its operating lease revenues in the first quarter of 2002 were $201.4 million, compared to $199.5 million in the same period of 2001. The numbers beat analysts’ expectations but PanAmSat is not out of the woods yet. Hugel noted: “There are several one-time items in the reported EPS [earnings per share] numbers for the quarter and I believe that these results are somewhat misleading due to the inclusion of these charges. I believe that an EPS amount of around $0.08 versus the $0.14 reported more accurately reflects true operating EPS results for the company.”

–Mark Holmes

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