Europe*Star Expects Boost From Deal

Europe*Star expects a significant increase in its revenues over the next 18 months in light of the recent settlement of litigation problems between owners Alcatel [NYSE: ALA] and Loral Space & Communications [NYSE: LOR]. As a result of the settlement, Alcatel is acquiring Loral’s 47 per cent stake in Europe*Star, marking the end of the joint venture arrangement. The agreement also resolves Alcatel’s litigation against Loral and its subsidiary Space Systems/Loral (SS/L) over a contract dispute.

Yves De La Serre, the chairman and CEO of Europe*Star, expects this settlement to lead to an immediate upsurge in its business prospects. He told Interspace: “Sales last year were approximately $16 million. We expect a significant increase this year as well as next year. Next year, we could be looking in the $30 million range. That could make sense.”

The deal between Alcatel and Loral marks the end of one of the highest profile disputes in the satellite industry. For Europe*Star, the decision-making process on where to position and grow the business should be much easier. De La Serre admitted: “I think on the operations side, we cannot say the litigation between Alcatel and Loral has prevented Europe*Star from developing its business. What happened was that at the beginning it was foreseen that Loral through the Loral Global Alliance would help Europe*Star to market its capacity. But this was very inefficient and did not work at all.”

He continued: “The real damage to Europe*Star was from this and not from the fact that there was litigation between Alcatel and Loral … For the development of new activities and the opportunities to develop relationships with new partners, the fact there was a dispute between Loral and Alcatel was a drawback for Europe*Star. Every move on this subject needed to get prior approval from Loral, which was very difficult to attain.”

Terms Of Deal

The dispute centred on SS/L’s termination of contracts between itself and Alcatel’s satellite manufacturing unit, Alcatel Space, in 2001. Alcatel objected and pursued litigation against Loral. But, this issue, as well as a number of other issues between the companies, have now been resolved.

Loral has also transferred its interest in the SkyBridge satellite broadband project to Alcatel and Alcatel has given up its interest in Loral’s CyberStar unit. Loral has also agreed to pay Alcatel $13 million in cash, $5 million now and $8 million no later than one year from now.

As part of the dispute, Alcatel, Loral and Intelsat have agreed that Intelsat will pay Alcatel directly, rather than through Loral, for Alcatel’s share of orbital incentives for the Intelsat IX and VII satellite programs. Alcatel believes these payments will reach the $60 million range over the next few years. The transfer of the ownership stake in Europe*Star to Alcatel is subject to a German anti-trust review, which is likely to be complete this summer.

Roger Rusch, president of the TelAstra consultancy, believes the deal makes sense for Alcatel, even though it potentially could have gained more from a successful litigation. He told Interspace: “Alcatel was seeking a large amount of money. You have a company [Loral], which is financially troubled and probably would not be able to get the money. If they had gone through the court transaction and had been awarded $165 million or whatever they were after, the whole company would have probably collapsed and they would not have got the money.”

He continued: “By settling for a small amount and having the incentives from Intelsat paid separately, they are able to get this $13 million and have real cash in their hands. If they had gone for the bigger amount they may have got nothing. This cleared up a lot of the alliances they had and tidied things up. From Alcatel’s perspective it was probably the best they could do. I think Loral got off easy. A lot of people were anticipating they were going to lose big in this case. It has taken care of an issue that was over their heads.”

Following the settlement with Alcatel, Loral announced July 15 a deal to sell six satellites – Telstar 4, 5, 6 and 7, which are currently in orbit, as well as Telstar 13 and 8, which are scheduled to be launched later this year and in the first half of next year – to Intelsat for up to $1.1 billion in cash. Loral has also filed for Chapter 11-bankruptcy protection and will aim to reorganise around its remaining fleet of five satellites and its satellite manufacturing operations. Loral will use most of the proceeds of the sale to repay all $959 million of its outstanding secured bank debt. (More comprehensive analysis of this story will be featured in the next edition of Interspace).

While the deal Alcatel/Loral settlement appears to be good news for Europe*Star, its future is far from assured. Alcatel, which is mainly in the satellite manufacturing business, is unlikely to want to stay in the satellite operating business long-term. The likelihood of Europe*Star being sold or another investor taking a significant stake is very strong.

According to De La Serre, “It is not the intention of Alcatel to have the long-term position of being the lone shareholders of a satellite operator. The question is then when and how Alcatel would disinvest. There are two possibilities. You could find immediately a new partner, which could take a share or buy the whole of the company. The second is for Alcatel to develop more the orbital slots that Europe*Star has by developing the business and then, in a few years time, selling the business at a better value. We are considering these two possibilities.”

Europe*Star offers satellite capacity on its geostationary satellites. Despite the change of ownership structure, the company has very limited capital expenditure plans over the next few months. De La Serre commented: “We have very limited capital expenditure plans over the next 12 months. We will spend some money for securing some applications, but that is all. It is too early to talk about new satellites. Firstly, we have to fill the existing satellites. On Europe*Star 1, currently on a full-time lease, we have a 43 per cent fill rate. On Europe*Star B, we have 75 per cent. We target to be above 50 per cent on Europe*Star 1 this year and 60 per cent would be a good figure for next year.”

In terms of new markets, De La Serre hopes Europe*Star will make an impact in India, the Middle East and other markets in Europe. “Europe now is also quite interesting for us, especially for new applications in the broadband multimedia business. We are discussing and developing some applications, which use DVB-RCS technology. I think co-operation between Europe*Star and Alcatel had previously not been very easy. It is one of my targets to develop that relationship in the future. I hope this will bring business opportunities for us,” De La Serre concluded. –Mark Holmes

(Contact: Laurent Zimmermann, Alcatel Space, e-mail: [email protected]; Roger Rusch, TelAstra, e- mail: [email protected])