SES Global Prepares For Rebound

Luxembourg-based SES Global, the world’s largest satellite operating company, appears to be bottoming out and heading for a financial upswing starting next year.

That is the view of key satellite analysts who track the company closely and who point to promising developments that range from SES Americom’s satellite leasing agreements with EchoStar Communications [DISH], rising demand for transponder-hogging HDTV in North America and increased direct-to-home television programming in Europe. Indeed, the positive spin from the analysts largely looks past SES Global’s 2003 results released last week that showed declining revenues and earnings before interest, taxes, depreciation and amortization (EBITDA).

Tom Watts, a satellite analyst with SG Cowen, said SES officials confirmed expectations for a flat performance this year but he spoke confidently about achieving double-digit- percentage revenue gains during 2005 and 2006 that would be driven by internal activities. New areas of opportunity that SES is seeking to exploit include broadband, anchoring customer relationships with EchoStar Communications [DISH] and Connexion by Boeing for SES satellites, and rising demand for government services.

“New initiatives beyond these organic growth opportunities will further support these double-digit expectations,” Watts said.

Entrepreneurial EchoStar

Last December’s marriage that brought DirecTV, the biggest U.S. satellite TV operator, into the media empire of News Corp [NWS] appears to have driven rival U.S. satellite TV services provider EchoStar into a growing alliance with SES Americom, the U.S. arm of SES Global. The relationship between EchoStar and SES Americom had begun warming in March 2003, when the satellite TV services provider agreed to fully lease the Princeton, N.J.-based company’s AMC-15 satellite for as many as 15 years, according to a research note Watts wrote to his clients March 23.

EchoStar intensified that emerging alliance further last week by committing to long-term contracts to fully lease two additional SES Americom satellites, AMC-14 and AMC-16. The latter two satellites had not been included in the SES Global order backlog that previously had reached 6.4 billion euros (US$7.78 billion), Watts noted. The AMC-14 satellite should become a “significant contributor” to future revenues for SES Global in the second quarter of 2005, while AMC-16 should do likewise in the same quarter the following year, he added.

The AMC-14 satellite will be equipped with 32 Ku-band transponders, while the AMC-15 and AMC-16 satellites each will have 24 Ku-band and 12 Ka-band transponders, said Yves Feltes, SES Global’s press relations manager.

In total, EchoStar now has agreed to lease three yet-to-be-launched SES Americom satellites that collectively consist of 78 Ku-band and 24 Ka-band transponders. This pre- leasing agreement ultimately should aid SES Americom’s current utilization rate of 71 percent for its in-orbit satellites.

“Going forward we will look to SES for announcements regarding additional contracts on upcoming satellites, progress in its Astra, government and broadband businesses, and details on new business initiatives, such as Satlynx,” Watts forecasted.

Bullish Review

Another satellite analyst who is bullish about SES Global is Morgan Stanley’s Sarah Simon.

“In our view, the 2003 results are somewhat of a side show,” Simon explained in her March 23 research note. The outlook from SES Global’s management is the most robust among any of the fixed satellite services (FSS) operators during the past three years, Simon added.

In the United States, SES Americom is poised to respond to a shortage of Ku-band capacity that is beginning to emerge as new channels are launched, interactive services are tested and high-definition television grows in popularity and availability, Simon explained. HDTV is an important opportunity because it requires around three times the amount of capacity as a normal channel of television programming.

“Management sees substantial growth in the number of HDTV channels in the coming months and years, and this will absorb existing capacity in the marketplace,” Simon wrote.

Marketplace developments in Europe also could help SES. The parent company’s European FSS unit, SES Astra, has detected strong demand for DTH capacity in the United Kingdom that could be addressed from the company’s 28.2 degrees East orbital slot, Simon noted. With only four out of five SES Astra transponders currently unfilled at that orbital location, the company likely will need to move another satellite into that position prior to the 2006 launch of two new satellites, Astra 1KR and Astra 1L. Current SES plans call for both the Astra 1KR and the Astra 1L to be placed at 28.2 degrees East.

European demand is driven by interactive services and continued growth in the number of channels in the Sky satellite TV platform in the UK, Simon wrote. It appears to be a region of the world where transponder prices could rise if demand exceeds supply.

“In continental Europe, the company sees a considerable firming of demand, as the improvement in the economy stimulates new channels to launch,” Simon wrote. “Pay-TV operators are also looking to Sky’s lead in interactive services, and certain platforms are now experiencing capacity shortages.”

In contrast, the FSS sector overall has suffered from overcapacity in recent years. The problem stemmed from an excessive number of satellites launched during 1999 and 2000, when forecasted demand for transponders in Asia, Latin America and certain other regions in the world was too optimistic for the realities of the marketplace.

WorldSat Venture

On the heels of an announcement that SES would lease almost all of its Ku-band capacity on the still-to-be-launched WorldSat-3 satellite to Connexion by Boeing, SES officials told analysts two additional deals in the pipeline could account for 40 transponders worth of capacity on the same satellite. The satellite, under construction by France-based Alcatel Space, would be launched by the end of 2005 and operate in the Pacific Ocean Region from the 172 degrees East orbital location.

“This would be great news, given that the weakness in the international FSS market has been particularly weak in the transoceanic segment, to which Worldsat-2 and -3 belong,” Simon explained. WorldSat was created by SES Global in 2003 as a subsidiary of SES Americom. Already in service are the WorldSat-operated satellites: WorldSat-1 satellite at 108.2 degrees East; Spacenet-4 at 172 degrees East; TDRS-6 at 47 degrees West; and Satcom-C1 at 37.5 degrees West.

Despite the upbeat outlook for 2005 and 2006, SES Global faces risks this year from generally slack demand, rising insurance costs and anemic third-party transponder rental rates, Simon wrote.

Indeed, the 2003 results SES Global reported last week showed that the FSS sector still is struggling with overcapacity. Specifically, SES Global notched 2003 revenues of 1.2 billion euros (US$1.48 billion), down 10.5 percent from 2002. It also claimed EBITDA of 943 million euros (US$1.16 billion), dropping 14.8 percent from the prior year.

The drop-off in SES Global’s performance was exacerbated by a weakened U.S. dollar that, if held constant, would have limited the year-over-year dip to 3 percent for revenues and to 7.9 percent for EBITDA. Challenging market conditions during 2003 led to the slight decline on a constant exchange-rate basis, SES officials said.

On the plus side, company officials said the past year also marked “significant operational and financial successes” that included progress with its AMERICOM2Home concept through the signing of satellite capacity agreements with EchoStar. At SES Astra, more than 1 billion euros (US$1.21 billion) of new and renewed contracts were signed last year, they added.

However, 2004 performance will be hamstrung by higher costs due to growth initiatives and external factors that include increased insurance premiums, acquisition costs, development of the Worldview 2 and more aggressive marketing of broadband services, SES officials said. On the bright side, company officials are projecting a rise in net operating cash flow in future years as SES significantly cuts its investment in new satellites after 2004.

Further helping SES Global is a restructuring of its financing during the past year that trimmed its cost of capital going forward. The company also has industry-leading performance metrics that include an EDITDA margin of 78.1 percent, net income margin of 17 percent, return on average equity of 6 percent and a net-debt-to-equity ratio of 52.3 percent, its officials said.

Free cash flow at SES Global rose by 207 percent to 940.3 euros (US$1.16 billion) in 2003, due to the receipt of satellite insurance proceeds, settlements of foreign exchange swap transactions and other cash management strategies, company officials said.

The company’s financial stability also is reflected by a proposed 10-percent dividend hike to .22 euros (US$.27) per A-share. That dividend increase would be presented to shareholders for their approval at the company’s annual meeting May 6.

–Paul Dykewicz

(Tom Watts, SG Cowen, 212/278-4260; Sarah Simon, Morgan Stanley, 011 44 20 7425 6064; Mark Roberts, SES Global, 352 710 725 490)