Kullman: Loral Deal Was A ‘Unique Opportunity’

Intelsat’s deal to acquire six of Loral Space & Communications’ North American satellites and rights to the orbital locations is undoubtedly the biggest one in the satellite industry so far this year. The agreement will see Intelsat pay $1 billion for the satellites, which would give it vital coverage in North America if the deal is approved.

The assets to be purchased include the Telstar 4, Telstar 5, Telstar 6 and Telstar 7 satellites, which today provide North American coverage from the 89 degrees West, 97 degrees West, 93 degrees West, and 129 degrees West orbital locations. The agreement also includes two satellites currently under construction, Telstar 8 and Telstar 13. Intelsat has also agreed to order a new satellite from Loral and will make a $100 million down payment on that order upon closing of the current transaction. Loral is now under Chapter 11 bankruptcy protection.

Paul Hammer, a satellite lawyer at Houlihan, Lokey, Howard & Zukin, said the deal was a smart one for both sides. Intelsat is “flush with cash right now at a time when the market is probably pricing satellites and transponder capacity at pretty close to an all-time low,” Hammer said. “I think it is a pretty savvy move for Intelsat to pickup assets on the cheap. It is a pretty good move for everybody considering it frees up some birds for Loral. It will increase the likelihood that Loral will restructure quickly,” he added.

Others, however, are not so sure. One European industry observer who requested anonymity told Interspace: “The price is too high. If you look at the assets strategically, they are maybe not the most attractive, but access to the orbital slots for a company like Intelsat, which lacks such slots can make strategic sense. The price they are willing to pay for it is a different story.”

If the deal is completed, Intelsat will be in a better position to compete in the broadcast and cable markets in North America. In an exclusive interview with Interspace Senior Editor Mark Holmes, Intelsat CEO Conny Kullman outlines the importance of the deal for his company and how it aims to become a major player in the North American video arena.

Interspace: Could you tell us the significance of the Loral deal from Intelsat’s perspective, especially compared to other deals Intelsat has done recently? How will this boost Intelsat’s competitiveness in the U.S. television arena? What impact do you think these new satellites will have in terms of generating new revenues?

Kullman: Let me give you a very quick overview of our “focused four” strategy. First, we want to sustain and find growth, as well as service replacement opportunities, in our core voice and data business. We are obviously very strong on that side but, again, voice is an eroding business, and there is no question we need to find new markets. Part of the Loral acquisition addresses that market segment. They have a relatively strong corporate data customer base in the U.S.

Second, we are looking to grow market share in video and government segments. We have separated both businesses out into separate corporate units, now with their own profit and loss responsibilities. Around the government segment, we have created a separate corporate legal entity and moved those people outside of this building so they can address the government’s needs more directly and have the right clearances in place to do that. Loral clearly had a good video business and that fits very nicely with our plans to grow our market share in video. In addition, they have a small government business, but we believe that these satellites can address government needs in a larger way. Also, these satellites have coverage of the 50 states, and not just the 48 states that many other satellite operators have. So, we think there is a good opportunity to grow the business on the government side. As an anecdote, we have seen six to seven RFPs [request for proposals] recently for government contracts where we have not been able to bid because we did not have the American part of the coverage that they required. We would now be able to address these kinds of networks [with the Loral acquisition].

Third, we want to invest selectively in growth markets including broadband and DTH [direct-to-home]. Obviously, here you get into the investments we have done in Galaxy in Hong Kong and broadband in terms of the WildBlue investment. Loral has a pretty healthy DTH ethnic business where they pick up regional and niche programming that they broadcast around this country on their Telstar 5 satellite.

The fourth piece of our strategy is to enhance our service mix and our geographic coverage. There is a hand-in-glove type fit with these assets and our strategy. All of these six satellites sit over the US. Four of them address the broadcast arc. Two of them address the cable arc. It gives us a very good business over North America and, of course, in the past, as an international co-operative, we could not service the domestic U.S. and Canadian market. With these assets, we have plugged a hole in our business line-up from a geographic standpoint.

Interspace: How do you view the $1 billion price tag for these six satellites?

Kullman: We think we are getting a fair price. We are paying on the order of book value and, if you compare this with some of the transactions which were done a couple of years ago, you will find that people were paying up to three times the order of book value. Obviously, there has been a downward trend in the stock markets in the last two years. I think for the market conditions we are in and what we believe we can do with these satellites, we are definitely paying a fair price. If we were to do this organically, which we couldn’t do because the orbital locations are not available, you could not launch this capacity for less than $1.5 billion to $1.8 billion.

Interspace: How would you describe the company’s strategy going forward in North America?

Kullman: The focus for the next 12 to 24 months is to develop the video strength and the media and entertainment business that these satellites come with, as well as the potential for future business. We have been limited to bringing content to the boundaries of the U.S., but have not been able to distribute it over this country. We have handed it off to players like Loral and to both PanAmSat [Nasdaq: SPOT] and SES. Now, we can provide end-to-end solutions for those programmers and get them all the way from the source to their destination. Whatever packages the content providers have here in the U.S., they can use our network to transmit it to the whole world. We definitely see an opportunity to build a video business, both taking market share in North America as well as developing the video business around the world with these assets. In addition, there is the government and military market segment. With these assets, we can now provide a very strong total global solution for government requirements. There is a third area, corporate networks, where we can target players in the oil and gas industry, for example. So, for the corporate network market, we can now offer end-to-end solutions, and we do that not only with the satellites, but with the terrestrial infrastructure we have put in place.

Interspace: How will the acquisition impact your capital expenditure plans in terms of new satellites over the next two to three years?

Kullman: We have bought 31 satellites from Loral over the years. So, it is very easy to integrate these satellites into our operations. The other element here is that this is an asset deal. We are buying the satellites, orbital locations, the customer contracts and intellectual property to fly these satellites and operate the business on the satellites. But, it is important to point out, we are not buying any liabilities or any staff from Loral. We have the right to hire sales and marketing people, but we can do that selectively. So, this means we can integrate this deal quickly and very efficiently from an operating expenditure side.

These satellites hang over North America. We do not have satellites over this continent right now. There is no direct capital expenditure savings by putting the two fleets together. The savings are more on the operational side. We obviously continually review our capital expenditures, and have actually been pretty firm in cutting down our capital expenditure this year and in our five-year plan. We are done with the investment cycle. All the Intelsat IX series satellites are up, and we only have one more satellite to launch. From this combination of Loral satellites and our new fleets, we will get a very strong free cash flow.

Interspace: Was it always your strategy that in order to get this North American position you were going to have to buy into it?

Kullman: Yes. This was the unique opportunity to get six orbital locations over the U.S., which we consider beachfront property. We really had to buy into it, and that is what we did. We get these orbital locations, $550 million book of business with customers like CBS, Fox and ABC.

Interspace: Is an initial public offering (IPO) unlikely this year? When we spoke before you said the company “had quite a good story to tell the market.” In light of the deal with Loral, I assume the story just got a whole lot better. Will this impact your decision on when you hold an IPO?

Kullman: As we spoke last time, we are committed to having our IPO, and to adhere to our obligations under the ORBIT Act. Aside from the legislation, an IPO is the right thing to do for our shareholders and the business. It gives us public equity for executing some of the transactions we may want to make in the future. It would be premature to give you an exact date for an IPO. I continue to believe we have a good story to tell with the way our base business is developing today. And we see ourselves coming out of the Loral transaction as a stronger and more valuable company and getting an even better story to tell the marketplace.

Interspace: What are your final thoughts on the Loral deal and what it brings to the company?

Kullman: We got strong board of directors approval for this deal. Now, we need to get shareholder approval and we are planning to get the shareholders together on Aug. 15 for this purpose. We also need DOJ [Department of Justice] and FCC [Federal Communications Commission] approval, and we are filing this week with both. In terms of DOJ, since we don’t have any satellites over the U.S. and no domestic business, we do not anticipate any problems. We believe they will come out with a positive ruling towards the end of August. Then there is the auction process. This is a 363(b) sale as part of Loral’s bankruptcy. We expect that process to be over some time in the October timeframe. The FCC typically takes six months to approve a transaction like this one. We expect to close this with Loral in the first quarter of 2004. It is not a done deal yet. We are taking the first steps, but we think we are in a good position to close out on this because of the agreement we have with management.

The way I look at this deal is that we had a unique opportunity because of Loral’s situation where they had a mountain of debt to deal with. We could work with their management and almost surgically go in and cut out the assets we were really interested in. If you look at the rest of their fleet – their Orion satellites are running in orbital locations and connectivity, which are very similar to what we already have – those assets would not have added much for us. Our agreement would give us the beachfront property over the U.S., which addresses the exact needs we had for our customer base and to grow our business. So, I am very pleased with the way this transaction turned out and the way it addresses our core needs for the future.

(Contact: Susan Gordon, Intelsat, e-mail: [email protected])