Consolidation Wasn’t Supposed to Look Like This
By Timothy J. Logue
Holiday parties for the satellite set during the last few years have been fun but also thought provoking. The morning after often involves lip chewing and hand wringing. Why? Because far too often when we’ve gotten a chance to informally share views and news about the state of our industry, the questions have been: “How are you doing?” and “What is so- and-so doing now?” These have been constant questions for us since the high-flying new operators of the 1990s hit the wall and the telecom/Internet bubble burst.
Many of us concluded that consolidation among the proliferating fixed satellite service (FSS) and mobile satellite service (MSS) operators was the only reasonable outcome. Some of the manufacturers also seemed likely to follow that path. In addition, there seemed no way that all of the launchers about to enter the market would stay in it for long. It seemed so simple, though hardly painless. We hoped it would be quick. It hasn’t been. What has transpired instead has certainly been painful, in the form of bankruptcies and layoffs from Wall Street to California and beyond. But, the long-anticipated consolidation largely has not happened.
Among satellite operators of various services, mergers have been few. In one of the biggest proposed mergers, EchoStar Communications [Nasdaq: DISH] and Hughes Electronics [NYSE: GMH] could not gain regulatory approval. But a subsequent merger between Hughes and News Corp [NYSE: NWS] finally got the regulatory nod at the end of the year. This had more to do with the economic state of the auto industry than the satellite industry, since General Motors [NYSE: GM], the parent of Hughes, wanted to raise cash.
On the other hand, apparent economic necessity was not enough to cause a merger between MSS operators ICO and Globalstar. A few small FSS operators have sold significant shareholdings to bigger operators. Examples in recent years include the sale of NSAB and AsiaSat to SES Global [Luxembourg: SES] and Hispasat to Eutelsat. What we have not seen so far is any mergers among the regional operators in Latin America or Asia, nor scavenger hunting on a large scale by current or emerging global operators. The one exception arguably may be Intelsat’s purchase of bankrupt Loral Space and Communication’s [OTCBB: LRLSQ] North American satellite assets.
Why widespread consolidation has not happened appears due to several factors. First, national and corporate pride led to the launch of many systems and that same pride (along with government funding) certainly is keeping some of them alive. In addition, many of these national systems have government preferences, licenses and concessions that would be hard, if not impossible, to transfer to a foreign owner. In addition, many of the global operators have plenty of capacity available, so why should they buy more half-empty satellites? Finally, for the European and U.S. FSS operators, a big hindrance could be the fear that anti-trust/competition regulators in the United States and the European Union would prevent a merger from being consummated. Mergers among the non-geostationary MSS operators might have made sense, but the difficult economics of the market and the prospect that only one operator would survive has likely kept them apart. Only AMSC and TMI seemed to have the good sense to rationalize their systems through a merger several years ago.
Mergers among the U.S. satellite manufacturers seemed problematic because of anti-trust concerns. However, a down market could make the move palatable to regulators. The intricate dance of consolidation among the European manufacturers always seemed eventually to lead nowhere, though at least some governments seemed to think it made sense. While an international merger would make even more sense, it would be extremely difficult in the current national security and export control environment. Given the limited number of satellite contracts available today, the rationale for mergers among the “big three” U.S. manufacturers seems not to be compelling. Why buy a competitor, even if the regulators would permit it, and take on the debt and unneeded capacity, when a manufacturer simply could compete for the few contracts that become available. Some manufacturers no doubt believe, and not without reason, that their competitors will fade away. Finally, the technical problems and related liabilities of some satellite series could further tip the scale against mergers.
Explaining the launch services market is even harder, with far too much launch capacity chasing too few commercial contracts. However, increased use of space by the U.S. and European government/military sectors surely is keeping some providers in the game awhile longer. How much longer is hard to predict, however.
Instead of consolidation, the really big news out of the current downturn is that control of significant segments of the satellite services market has passed into the hands of private investors whose identities, let alone strategies and plans, are a virtual mystery to most in the industry. The shift to private equity has occurred because the public equity market virtually dried up and because the bankruptcy process often ended in an auction that opened the way for well-heeled private equity groups. Today, not a single MSS operator is publicly held. In addition, several of the public telecom operators that once owned significant shares of Eutelsat have sold out to private investment groups. The list of publicly traded operators on the back of this newsletter will get even shorter this year.
One can only wonder if conversations over cocktails during next year’s holiday parties are likely to be punctuated by “What are they [the private investors] up to?” or “What did they think they were getting into?”
Timothy Logue is a Washington-based space & telecommunications analyst with the Coudert Brothers LLP law firm. He can be reached by phone, 202/736-1816, or e-mail, firstname.lastname@example.org .