Industry-wide Impact of Loral’s Bankruptcy
By Jimmy Schaeffler
New York-based Loral Space and Communications [OTC BB: LRLSQ] filed for Chapter 11 bankruptcy court protection July 15 in a move that has had widespread implications for other companies in the industry.
Loral Chairman and CEO Bernard Schwartz is using the bankruptcy process to good advantage. He generally has satisfied Loral’s secured creditors, vendors, and obtained new satellite manufacturing contracts during the past few months. In fact, the company’s manufacturing contracts came from coveted customers that included DirecTV, PanAmSat [Nasdaq: SPOT] and Intelsat.
In addition, Loral’s pending sale of North American satellites and related assets to Intelsat could spur long-term competition with other fixed satellite service (FSS) providers. Deep-pocketed Intelsat, still seeking final court and regulatory approvals to complete its purchase of Loral’s assets, should be able to use the capabilities to expand its existing role in the broadcasting, direct broadcast satellite (DBS) and FSS sectors.
The two largest U.S. satellite TV service providers, DirecTV and EchoStar Communications [Nasdaq: DISH], have been leading customers of Loral-built spacecraft. DirecTV, with 56 percent of the U.S. DBS market, and EchoStar, the fastest-growing U.S. DBS provider for the past two years, recently engaged in a bidding war through the bankruptcy court to determine who would be allowed to acquire the almost-complete DirecTV 7S satellite.
At the end of the process, DirecTV paid $160 million for the DirecTV 7S – approximately $25 million more than the original contract price. DirecTV also offered $25 million in a down payment on each of its existing satellite orders with Loral. Sister company PanAmSat also helped the cause by placing an order for one additional satellite and an option for another.
Hughes Electronics’ [NYSE: GMH] DirecTV currently is operating two Loral-built satellites, DirecTV 5 and DirecTV 6, while EchoStar has launched four Loral birds, EchoStar-5, EchoStar-6, EchoStar-8 and EchoStar-9. Thus, both companies know and understand Loral and its satellite manufacturing business pretty well.
As he has been known to do, Charlie Ergen, the enigmatic chairman, founder and CEO of EchoStar and its DISH Network, used Loral’s U.S. bankruptcy court proceedings to drive up the price DirecTV paid for its newest round of Loral orders. EchoStar bid to buy the entire Loral company, and later made a pitch for the DirecTV 7S that ultimately was thwarted.
Ergen used his company’s legal division to force both DirecTV and Intelsat to pay significantly more for the satellite assets that each company ultimately acquired. The result is not unlike EchoStar’s failed purchase of Hughes/DirecTV during 2001-2002. Even though the deal unraveled, Ergen succeeded in learning all about Hughes and its subsidiaries. He also significantly slowed his rival’s sales efforts and overall growth in the process. The Loral proceedings allowed Ergen to require DirecTV and Intelsat to take longer to transact their business and boosted their cost of doing so.
For Intelsat, Loral’s bankruptcy meant an opportunity to gain a solid foothold in the North American FSS and DBS markets. Intelsat originally bid $1 billion on July 15 for six of Loral’s satellites and their associated assets. Following technical problems with one of the original six satellites, Intelsat’s final bid was later reduced to five satellites and six orbital slots.
In the following weeks, Intelsat was compelled to offer an additional $100 million for the satellites and orbital slots to fend off what ultimately became a $1.8 billion bid from EchoStar for all of Loral’s assets. Those assets included Loral’s manufacturing facilities, five remaining international satellites and their associated assets, ground- operation facilities, as well as data and network services.
In the end, the bids by EchoStar involved mostly nuisance value for just about every other party involved, except perhaps the secured Loral creditors, who ended up with more money in their pockets based upon EchoStar’s involvement in the bidding.
The new FSS birds would give Intelsat a chance to directly compete with the likes of rival North American FSS providers PanAmSat and SES Americom. The North American satellites and orbital slots Intelsat is acquiring include: Telstar-5 at 97 degrees West longitude (WL), Telstar-6 at 93 degrees WL, Telstar-7 at 129 degrees WL, Telstar-8 at 89 degrees WL, and Telstar-13 at 121 degrees WL. Additionally, Intelsat is acquiring the 77 degrees WL slot, where a disabled Loral satellite is orbiting today. With six orbital locations, Intelsat would have the opportunity to perhaps offer to sell EchoStar, DirecTV and the new DBS service, VOOM, capacity on one of the birds. Additional capacity for these providers would aid in their rollout of high definition TV (HDTV), the delivery of local services via satellite (also known as local-into-local), and two-way broadband and Internet services. Intelsat might also have an opportunity to create its own VOOM-like service. VOOM, a satellite TV service launched Oct. 15, is operated by Rainbow DBS, a business unit of Cablevision Systems [NYSE: CVC].
Satellite-delivered services increasingly are becoming part of the consumer electronics (CE) world. Examples in the satellite TV realm are EchoStar, DirecTV and now VOOM. Those systems use set-top boxes, dishes, remotes and ancillary hardware. EchoStar’s bidding in the Loral bankruptcy process could mean DirecTV and Intelsat may charge higher prices on hardware to cover the additional payments required to acquire the assets they wanted from Loral. It might also mean an increase in the prices charged to customers for programming and other services. More likely, what it means is a longer payback period for DirecTV and Intelsat on the assets purchased. A positive side effect is that financiers will be more likely to agree to lend to satellite companies in the future, after seeing the value that satellite assets still possess in bankruptcy proceedings. In turn, more investment in satellites means a healthier industry. That is good for consumer electronics retailers. Loral’s continued presence as a satellite builder helps the operators by keeping an additional competitor in the bidding process for new orders.
The Loral proceedings certainly point out the continued competitive dynamic between EchoStar and DirecTV, as well as between EchoStar and anyone or anything else in the multichannel industry that conceivably could be considered a rival. This was exactly the point made by those opposing the EchoStar purchase of DirecTV a year or so ago. Competition between EchoStar and numerous actual and perceived rivals means consumers will have more choice in the content and equipment they use. As a result, the Loral bankruptcy proceedings have a clear impact on other satellite companies, CE retailers and consumers. Whoever thought Loral’s bankruptcy might reduce competition in the satellite industry should reconsider. Indeed, Loral seems to be stirring up the competitive juices of its fellow satellite companies more in bankruptcy court than in the marketplace.
Jimmy Schaeffler is a subscription services analyst at The Carmel Group (http://www.carmelgroup.com), a consultancy based in Carmel- by-the-Sea, Calif., and a publisher of industry databooks and newsletters. The company specializes in telecommunications, computers and the media. He can be reached by e-mail: firstname.lastname@example.org .