Intelsat CFO Details Reasons For Loral Purchase
Industry speculation that Intelsat agreed to pay more than market value for the North American satellite assets of Loral Space and Communications [NYSE: LOR] is way off the mark, Intelsat’s top financial executive said in an exclusive interview with SATELLITE NEWS.
The roughly $1 billion price Intelsat has offered to pay for six satellites and orbital slots from Loral is a “very fair deal,” said CFO Joseph Corbett. “We were able to negotiate a deal with a public company that was having extreme financial difficulties,” he added.
Corbett said he expects his company to maintain its investment-grade status if the judge overseeing Loral’s Chapter 11 bankruptcy proceeding approves the proposed transaction. If the deal is approved, Intelsat will have close to $2.4 billion in debt after raising the $1 billion it would need to complete the Loral deal.
“We clearly are very happy with the price we paid,” Corbett said. “We got what we wanted. The debt load will be manageable and keep us at the investment-grade level.”
The agreement between the two companies was structured to grow “shareholder value” for Intelsat investors, to help the company fill its existing gap in North American satellite coverage, and to increase its presence in the video/broadcast market, he said.
Intelsat currently has $1.4 billion in debt financing that includes $1.2 billion in public debt, Corbett said. A key strength for the company is its strong cash flow that enables it to secure financing when needed, he added.
For example, Intelsat achieved more than $700 million in earnings before interest, taxes, depreciation and amortization (EBITDA) during 2002. The company has announced that it plans to spend less than $300 million this year.
Savvy Deal Maker
Bernard Schwartz, chairman and CEO of Loral, is known as a savvy deal maker, as well as a financial and accounting expert. However, his leverage to hold out for top dollar was limited by Loral’s financial problems.
In addition, there may have been antitrust problems if rival satellite operators PanAmSat [Nasdaq: SPOT] or SES Global [Luxembourg: SES] had tried to buy the Loral satellites. PanAmSat and SES Americom, the U.S. unit of SES Global, each have roughly a 40 percent share of the North American market, while Loral has roughly a 20 percent share of the North American market.
“Our two largest competitors, PanAmSat and SES, would have had a more difficult time from a regulatory perspective to bid on the assets,” Corbett said. “Loral really only had one buyer with the cash flows to fund a deal and the strategic objective to do business in North America.”
The tailor-made purchase of Loral’s North American satellite assets is “all meat and no fat,” Corbett said. “We carved out exactly what we wanted.”
Intelsat assessed the value of Loral’s North American satellite assets by reviewing the discounted cash flows from the four in-orbit satellites and the likely discounted cash flows that would be produced by the two satellites that have yet to be launched, Corbett said.
Any valuation of the purchase is limited because it could only include actual 2002 EBITDA or prospective 2003 EBITDA from the four in-orbit satellites that are generating revenues. The four in-orbit satellites have a backlog of orders totaling $550 million.
“You need to consider that two more satellites are on the ground,” Corbett said. One satellite, Telstar 13, is scheduled for launch next month. A second satellite, Telstar 8, one of the largest ever to be launched, is scheduled to lift off next year.
The assets to be purchased include the Telstar 4, Telstar 5, Telstar 6 and Telstar 7 satellites that provide North American coverage from the 89 degreesW, 97 degreesW, 93 degreesW, and 129 degreesW orbital locations, respectively. The agreement also includes two satellites currently under construction, Telstar 8 and Telstar 13. The Telstar 13 satellite, co-owned with EchoStar Communications [Nasdaq: DISH], is to be located at the 121 degreesW orbital location after its scheduled launch early next month. The Telstar 8 satellite would be deployed at the 89 degreesW orbital location, following the spacecraft’s launch in early 2004. At that time, Telstar 4 would move from 89 degreesW to 77 degreesW. The in-orbit satellites to be acquired currently carry traffic for major broadcasters, cable operators and private data network operators, such as CBS and Fox [NYSE: FOX].
“What we would get out of the bankruptcy process is that we would receive these assets free and clear from any encumbrances,” Corbett said. “If the transaction is consummated, we will get a court order that delivers these assets to Intelsat with a clear title transfer. It is generally a very fast process.”
The acquisition is expected to occur at the conclusion of the Chapter 11 auction process.
“Clearly, we do not want to be tied up with a transaction for a long period of time,” he said. The auction scheduled to take place during the bankruptcy process would allow Intelsat to gain ownership of Loral’s North American assets without any liens.
Intelsat is using the New York-based law firm Sullivan and Cromwell’s bankruptcy group for legal advice on the transaction. The structure of the deal is not unusual for bankruptcy cases.
In addition to the bankruptcy’s auction process, Corbett said that Intelsat also would need Department of Justice, FCC and Intelsat shareholder approvals. –Paul Dykewicz
(Susan Gordon, Intelsat, 202/944-6890; Bernard Schwartz, Loral Space, 212/987-1105)