New Skies’ Sale Was The Right Move
By Paul Dykewicz, Senior Analyst/Senior Editor
The chance to sell New Skies Satellites N.V. [NSK] for a whopping $956 million to affiliates of the Blackstone Group last week was too good of an opportunity for the company’s management and shareholders to forgo. A deep-pocketed financial owner can help to bring fresh insights to management, it can provide a potential funding source to pursue new opportunities, and it can offer a longer-term investment horizon than the quarter-to-quarter approach generally taken by public companies.
Dan Goldberg, a lawyer by training, has proved to be a respectable CEO who has impressed me for keeping the interests of his shareholders foremost in mind. One example includes strategically buying back the company’s shares when they were selling at a discount to the company’s true value. Another instance occurred when he and his management team explored the possible purchase of various regional satellite operators. They ultimately passed on the opportunities when it became clear the industry was entering a phase of excess capacity. In such a business environment, acquiring another operator – even a small one – likely would compound the problem of weakened financial results rather than to provide a remedy. He also is aided by Andrew Browne, one of the industry’s top CFOs who previously held the same job at Intelsat. He’s done a terrific job of minimizing the company’s debt and maximizing its cash flow.
The News Skies management has operated the company largely as I would have attempted to do it, if our roles had been reversed. Management smartly has avoided gambling the company’s future on high-risk ventures that its limited size would not have allowed it to sustain if unforeseen problems arose. The bankruptcy of Loral Space and Communications [LOR] due to its ill-fated backing of the multi-billion- dollar Globalstar satellite voice service is a case study waiting to be written about the peril of making too big of a commitment to a cash-burning monster disguised as a business.
New Skies, for the long haul, unfortunately is in a no man’s land as an undersized global satellite operator. It is too small to compete effectively around the world with industry behemoth SES Global [SES], Intelsat, PanAmSat and Eutelsat. New Skies’ global reach also leaves it spread too thinly to stick to a particular region and to compete as a niche operator. Don’t be surprised if New Skies ultimately is combined into one of the other large fixed satellite services (FSS) operators.
Intelsat, in fact, could be sold this fall. Ironically, News Skies was formed as a spinoff of Intelsat; however, New Skies could be consolidated into virtually any of the world’s big satellite operators. That combination would make the most sense when demand for satellite services recovers and when additional capacity is needed to meet demand. Despite a slightly improving economy, such a result could be at least two or three years away.
Meanwhile, Browne’s financial management of New Skies leaves Blackstone in a great position. The new owner can enjoy the benefit of owning a company with minimal debt, strong cash flows and a fairly stable customer base that results from signing long-term contracts. The investment profile seems to resemble a public utility. Investment firms have places in their portfolios for such businesses to help diversify risk.
A trend clearly is taking shape that is giving investment firms control of the satellite industry’s largest satellite operators. In the past couple of years, Eutelsat has been sold to financial buyers that share ownership in the company. Investment firm Kohlberg Kravis Roberts & Co. (KKR) bought PanAmSat last April for $4.3 billion. News Skies was sold last week, and Intelsat is headed in the same direction. The world’s largest mobile satellite operator, Inmarsat Ventures, was sold for $1.4 billion to two U.K.-based private equity firms in late 2003 for $1.4 billion.
The New Skies deal has yet to close but it is likely to do so by year’s end or by early 2005. Blackstone’s offer values New Skies at 6.9 times the company’s estimated 2004 Enterprise Value (EV)/Earnings Before Interest Taxes, Depreciation and Amortization (EBITDA), according to Patrick Fuhrmann, a satellite analyst with ABN AMRO. In comparison, KKR’s purchase of PanAmSat in a similar bidding process resulted in a valuation of 7.2 times estimated 2004 EV/EBITDA, Fuhrmann calculated. The slightly higher multiple paid for New Skies shows its management has performed well. PanAmSat is a well-run company, and the ability of New Skies to gain a valuation equal to or slightly above the one its bigger rival received is impressive.
Too many companies have been plagued by executive teams with ambitions higher than their ability to finance or manage. New Skies is a good but smallish global satellite operator that should continue to turn a profit as long as Blackstone wants to keep it. The sale of New Skies is not a sign that its management has done anything wrong. Indeed, it indicates that the company’s management has served its shareholders well.
Paul Dykewicz is senior editor and senior analyst of Satellite News. He can be reached at 301/354-1769 or at email@example.com.