Loral Makes Tough Sacrifice to Stay Alive

By | September 10, 2003 | Feature

By Bharadwaj Ramesh, Industry Analyst, and Patrick French, Strategic Analyst, Frost & Sullivan

(Editor’s Note: This article was written before EchoStar [Nasdaq: DISH] made an informal offer for Loral Space and Communication’s six North American communications satellites, Telstars 4, 5, 6 and 7, which are currently in orbit, as well as Telstars 13 and 8, which are scheduled to be launched later this year and in the first half of next year, respectively. EchoStar has also declared an interest in acquiring the balance of Loral’s fixed satellite service (FSS) fleet and its satellite manufacturing assets).

The only doubt that the industry had about Loral’s bankruptcy was the timing, and not about the act itself. Globalstar’s bankruptcy and a series of disputes with regulators, satellite operators, and manufacturers combined with the downturn in the satellite manufacturing business to cripple the company.

Reviewing the operations of Loral Skynet, the cash cow for Loral, Frost & Sullivan’s “World Commercial Fixed Service Satellite Operators: Competitive Analysis” stated that “to a significant extent, Loral Skynet’s future will depend on the financial viability of Loral Space & Communications.”

The Skynet division has paid the price for being part of an ambitious, vertically integrated organization. During its recent existence, Skynet played a large role in sustaining the entire Loral Space & Communications company, and also needed to find cash for its own expansion. It was unable to do so. This severely restricted its ability to take advantage of any opportunities to grow by buying or taking stakes in other smaller operators to expand its fleet.

Skynet’s North American fleet and its orbital locations were offered for sale to Intelsat for up to $1.1 billion. Money from the sale of the North American fleet will be used by Loral to pay off $959 million of its $2.3 billion debt, which mostly arose because of Loral’s activities in Globalstar.

This fleet consists of four satellites in-orbit (Telstar 4, Telstar 5, Telstar 6, Telstar 7), and two yet to be launched satellites (Telstar 8, and Telstar 13, whose payload is shared with EchoStar). This deal, which could close in six months, is subject to Skynet meeting certain performance parameters, regulatory approval, and potential bids from others. The final price may well be lower.

Post sale, Skynet would be left with five satellites over Latin America and Asia, three of which are in-orbit (Telstar 10, whose capacity is leased from APT SAT, Telstar 11, Telstar 12), and two more (Telstar 14/Estreal do Sul 1, Telstar 18/Apstar V) that are expected to launch within a year. It is a real question whether the remaining fleet is a viable one and if what we are seeing here is a gradual (voluntary or otherwise) exit from the satellite operation industry a la Lockheed Martin Global Telecommunications. The sale of Skynet’s North American fleet could well be the first step along the path back to the company’s roots in the satellite and space manufacturing business.

Intelsat’s Matchless Opportunity

This acquisition is consistent with Intelsat’s twin strategies of increasing revenues from the video business worldwide, and gaining more presence in North America. With its bid for Eutelsat failing, Intelsat invested in the satellite-based broadband service WildBlue (North America), the direct to home service TVB (Asia), and now, Skynet’s U.S. video- driven fleet in prized orbital locations. In addition, it has also eliminated a competitor in a mature market. Skynet’s North American fleet was the perfect fit for Intelsat in terms of geographical presence and application. This was indeed a once in a lifetime opportunity for Intelsat.

North American Capacity

In 2002, North America contributed to 20 per cent of Intelsat’s total capacity and constituted 24 per cent of its total revenues. Simply put, one TPE of capacity over North America was more valuable to Intelsat than one TPE over any other part of the World. North America is also the world’s largest market for satellite services. Hence, it was inevitable that Intelsat would seek to increase its presence in this region, though this would have been nearly impossible to do so from scratch. Post Skynet’s fleet purchase, North American contribution to Intelsat’s total capacity could rise from 20 per cent to 28 per cent, while revenues from the region could increase from 24 per cent to 39 per cent.

In contrast to Intelsat, its main competitors generate more than 70 per cent of their revenues from video. Over the past year, Intelsat has moved aggressively to build its share of the video business. It has hired a new team, and has taken a stake in Hong Kong based TVB. By buying Skynet’s North American fleet, Intelsat’s revenues from video have almost doubled.

A Billion Dollars?

The $1.1 billion Intelsat is paying for the acquisition may decrease by the time the deal is closed as it is contingent on Skynet meeting certain performance parameters, and other parties can still bid for the fleet. Assuming that the final amount remains the same, and looking at the impact of this deal on Intelsat, Frost & Sullivan does not believe that Intelsat overpaid significantly for Skynet’s North American fleet, especially given Intelsat’s need to enter into this market.

In many ways, these satellites are more valuable to Intelsat than to PanAmSat [Nasdaq: SPOT] or SES Americom, the other two main players in the market. The $1.1 billion number is consistent with the failed $3 billion offer made by Intelsat for Eutelsat, an operator with annual revenues of $650 million and a fleet of 16 in-orbit satellites, four inclined satellites, and three satellites that are yet to be launched.

It appears unlikely that PanAmSat or SES Americom will make a counter-offer for Skynet. However the question needs to be asked whether these operators considered over $1 billion too high a price to keep Intelsat out of a desperately sought market.

Both these operators hold significant positions in the North American video market and any future combination with Skynet may be scuttled by anti-trust concerns. SES Global is still making the SES Americom-SES Astra combination work, and is laden with debt. PanAmSat, already concentrated in the Americas, is probably better served by expanding geographically.

Whither Global Alliance?

This sale could very well mark the disintegration of the Loral Global Alliance, a collection of satellite operators whose backbone was Skynet. In theory, the alliance was a smart move by Skynet to gain presence in new regions of the world. It enabled Skynet to remain competitive in the market, adding new partners and offering true global reach, while enabling its partners to do the same. In reality, Skynet owns a majority stake in two out of the three companies in the alliance (SatMex, Skynet do Brasil) in the volatile Latin American market, and just recently passed complete control of the third (Europe*Star) to Alcatel [NYSE: ALA].

It remains to be seen what happens to the remaining satellites in Skynet’s fleet over Latin America and Asia. Frost & Sullivan believes that the Asian and the Latin American markets have too many operators chasing demand insufficient to keep all healthy. This could very well be an opportunity for other operators to pick up the pieces.

(Contact: Bharadwaj Ramesh, Frost & Sullivan, e-mail: bramesh@frost.com)

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