Gilat Commits To Unusual Merger

Israel-based satellite company Gilat Satellite Network [Nasdaq: GILTF] intends to pay roughly $5.8 million, or 60 cents a share, to buy the remaining shares it does not already own in money-losing rStar [Nasdaq: RSTRC], a Sunrise, Fla.-based provider of satellite-based communications technology and services in Latin America.

The acquisition, expected to be a “short-form” merger of rStar with one of Gilat’s subsidiaries, requires Gilat to hold at least 90 percent of the outstanding rStar shares and file a Schedule 13E-3 form with the U.S. Securities and Exchange Commission, as well as fulfill other customary conditions. Gilat currently owns approximately 85 percent of rStar’s shares and reached the agreement to buy additional shares from certain shareholders to pass the 90 percent threshold.

In August last year, rStar acquired the StarBand Latin America (SLA) business from Gilat in a stock swap deal that gave Gilat the 85 percent stake in rStar.

Increased Flexibility

Barry Spielman, Gilat’s director of corporate marketing, said Gilat gains “flexibility” by taking rStar private. A public company faces a host of time-consuming and costly requirements that include filing financial statements with securities regulators, keeping in close contact with Wall Street analysts, and paying increased legal fees.

Armand Musey, a principal with the satellite investment-banking firm NearEarth, said, “The cost of being a public company has risen substantially in the past year or so. The additional burdens involve new requirements because of legislation that has increased the costs and legal risks for public companies. “It can be particularly onerous for small companies with limited public float,” Musey said.

Limited Coverage

Another factor that makes it less advantageous for small companies to remain public is that there are fewer Wall Street research analysts now, said Musey, who previously was a satellite analyst at Salomon Smith Barney. Consequently, it is difficult for small companies to communicate their story to analysts who can influence the decisions of investors, he added.

At the same time, Gilat may not want to go private because it would complicate efforts by its former debt holders and new equity holders to cash out of their investments, Musey said. A public company allows investors to sell their shares more easily.

The outlook for Gilat will be affected by whether protocols and equipment standards are adopted to drive down prices in its bread-and-butter VSAT (very small aperture terminal) business. “That is going to determine how fast the industry grows,” Musey said.

Financial Future

Gilat is not offering any guidance about its financial future. However, the plan to take rStar private leaves an open question about how Gilat ultimately will restructure itself. In July, the company adopted a comprehensive revamping plan aimed at increasing efficiency and cutting corporate expenses. Cost cutting and workforce reductions were done by each unit, according to specific goals and targets, rather than adopting an across the board reduction.

Gilat’s stock purchase of additional shares comes as rStar’s revenues are sliding. rStar’s revenues during the third quarter of 2003 dipped to $4.9 million, compared to $7.6 million in the third quarter of 2002. The decline was attributed to equipment sales falling to $1.1 million from $3 million, rStar officials said. Revenues from services decreased to $3.8 million for the quarter, compared to $4.6 million for the same quarter a year ago.

Reduced Revenues

The company had a net loss for the quarter of $3.6 million, or 3 cents per share, down from a net loss of $5.4 million, or 4 cents per share, for the same quarter in 2002.

rStar’s revenues in the second quarter of this year were a healthy $24.4 million as a result of $14 million generated in equipment sales. The strong second quarter revenues were due to effects of long-term capital leases with StarOne in Brazil, as well as the completion VSAT projects in Peru.

In the second quarter, revenues from rStar services were $10.4 million, due to sales generated by Gilat affiliates in Colombia and Brazil.

Founded in 1997, rStar operates satellite-based rural telephony networks, as well as high-speed consumer Internet access networks for the small office/home office, consumer, and government market segments in Latin America. –Paul Dykewicz

(Barry Spielman, Gilat, (972)3-925-2201; Doron Gefen, rStar, 954/858-1600; Armand Musey, NearEarth, 646/452-9931)

rStar’s Markets

rStar’s main markets are telephony applications and broadband Internet access in Latin America. Its networks are primarily used for:

• Fixed telephone service offerings, including IP applications, in remote and rural areas and in underserved urban areas, primarily in developing countries. rStar participates in international and local bids to deploy and operate large government sponsored telecommunications networks. Governments are showing heightened interest in telephony and Internet networks with a special focus on Internet connectivity to small communities and public schools.
• Broadband IP-based networking applications such as corporate intranets, corporate training and other broadband multicasting applications, as well as consumer broadband Internet applications.

Source: rStar