New Skies Eyes Alternatives With Goldman Sachs

By | May 3, 2004 | Feature

By Paul Dykewicz, PBI Media LLC

New Skies Satellites N.V. confirmed Friday that it was working with Goldman Sachs to consider its “alternatives” following the Dutch satellite operator’s recent unsuccessful bid to acquire PanAmSat [SPOT].

New Skies officials also acknowledged Goldman Sachs had provided assistance in helping the operator to explore a possible role in connection with the recently concluded auction of PanAmSat. This continuing relationship between one of the world’s most respected investment banking firms and the smallest of the independent global satellite operators is an interesting alliance.

A sale of New Skies might be the quickest way for its shareholders to benefit from the recent jump in the company’s stock price. Specifically, New Skies’ share price rose 11 percent on April 28, due to rumors and sketchy reports that the carrier was in play.

However, it is unclear whether a buyer would pay a premium beyond the existing stock price to acquire the shares. For example, PanAmSat was sold for a price of roughly $23.50 a share, down from its closing price of $27.79 the day before the sale was announced.

J. Patrick Fuhrmann, a Wall Street analyst who serves as director of satellite communications equity research at ABN AMRO, said little room exists for further appreciation in the New Skies stock price near term.

Fuhrmann’s calculations show the April 28 spike in the company’s stock price gave it a valuation of 7.3 times 2004 EV (enterprise value)/EBITDA (earnings before interest, taxes, depreciation and amortization). That valuation marks a slight premium to the 7.2 times what Kohlberg Kravis Roberts & Co. (KKR) agreed to pay in its winning bid for PanAmSat last month.

“If sold, we don’t believe New Skies should go for a multiple greater than PanAmSat’s, given its lower EBITDA margins, lower FCF (free cash flow) yield, lower utilization, smaller fleet (less scale), and shorter-term contracts,” Fuhrmann said. “In our view, these lower comparables equate to increased risk and increased expected return relative to PanAmSat. We believe private-equity investors will take these factors into consideration regardless of the size of the deal. Assuming a 7.2 times multiple, New Skies shares would fetch $7.66 per share, assuming year-end 2003 net debt of $27.9 million.”

Using a 2004 net debt forecast of $86.45 and the 7.2 times multiple, the share price increases to $8.14 or 3 percent higher than the current price, Fuhrmann said.

However, Fuhrmann raised his price target for New Skies, based on the recent strength of the U.S. dollar. His reasoning is that the dollar has strengthened almost 8 percent since we set his $6.29 year-end price target in February. At current exchange rates, the target price increases to $6.74 per share.

Without such a premium, his estimated intrinsic value for the stock rises to $7.26. In addition, New Skies and other fixed satellite services (FSS) operators still face significant risks that include lingering pricing pressure from overcapacity in some key markets and a slow pickup in demand in the local economies where the company does business.

With 18 prospective bidders for PanAmSat all possessing the financial capability to complete a transaction, plenty of interest could remain for the other satellite operators to find buyers. Indeed, Intelsat confirmed in a recent Securities and Exchange Commission filing that it recently had engaged in talks with prospective buyers but that it suspended those discussions to focus on completed its initial public stock offering (IPO) by a June 30 deadline.

New Skies, in typically cautious wording for public companies in search of a buyer, acknowledged there could be no assurance that the company’s consideration of “alternatives” will result in any “extraordinary transaction.” Also unsurprisingly, company officials opted not to comment further. The translation of these seemingly bland statements is that New Skies is seriously in its search for a buyer. The question is whether the company would fetch a price worth taking.

Paul Dykewicz is senior editor and senior analyst of Satellite News. He can be reached at 301/354-1769 or at pdykewicz@pbimedia.com.

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