Intelsat Drops Risky DTH Venture
Global service provider Intelsat is showing increased signs of conservatism by choosing to cut its losses and end its future commitments to the high-risk, Hong Kong-based direct-to-home satellite (DTH) TV service it formed as a joint venture last year with TVB, a provider and distributor of Chinese-language content.
The all-digital, multi-channel service features a range of premium Cantonese and other Chinese-language programming exclusively supplied by TVB, including a 24-hour news service. The Cantonese programming is targeted at the more than 90 percent of Hong Kong’s population who speak the language. Galaxy subscribers also receive international news, documentaries, movies and other entertainment channels.
Galaxy’s service offering is an attractive alternative for pay-TV subscribers in Hong Kong, said Conny Kullman, Intelsat’s CEO. However, Galaxy’s slower-than-anticipated growth led Intelsat officials to conclude it was not in the company’s strategic interest to invest additional resources and management time on the struggling business.
The caution likely is due to the venture’s slow start in signing subscribers, the likelihood of sustaining more losses than planned and the company’s pending sale to a group of private-equity firms that prefer the safety of steady cash flows rather than the uncertainty of capital expenditures on unproven ventures.
Intelsat last week chose to give up its entire 51-percent interest in Galaxy Satellite TV Holdings Limited, a company with a Hong Kong-based DTH satellite television subsidiary, Galaxy Satellite Broadcasting Limited. The subsidiary offers local and international pay-TV programming to the Hong Kong market but the venture has been a cash drain and a distraction from Intelsat’s core fixed satellite services (FSS) business.
The timing is partly influenced by Intelsat’s Aug. 16 announcement that it accepted an offer of $18.75 a share to sell the company, valued at $5 billion, to a group of private- equity investors. The transaction also involves the assumption of $2 billion in net debt. Intelsat’s board of directors unanimously approved the transaction last month.
Upon closing, Zeus Holdings Limited, a company formed by a consortium of funds advised by Apax Partners, Apollo Management, Madison Dearborn Partners and Permira, will own Intelsat.
Intelsat will sustain an accounting loss of $30 million for third-quarter 2004 from its investment in the joint venture. In addition, Intelsat reported it incurred a loss of $16.4 million on the venture for the first half of 2004. The bulk of that earlier loss occurred after the satellite TV business began providing commercial service during February 2004.
TVB’s expectation when the joint venture was announced during February 2003 was that Intelsat’s global distribution network and satellite capacity would make the satellite operator an ideal partner to provide a pay-TV service. The Galaxy service is uplinked through a teleport in Hong Kong to an Intelsat VII series satellite, then downlinked to roof- top receiving dishes in Hong Kong. Existing in-building wiring also can deliver the service to the apartments of individual subscribers in large buildings.
The total amount of Intelsat’s initial commitment to the joint venture during February 2003 was $69.5 million. The $30 million non-cash charge to be booked by Intelsat reflects the reduced net value on its balance sheet caused by the Galaxy investment after taking into account accumulated losses and the elimination of Intelsat’s ongoing commitments to the venture. Those ongoing obligations to the joint venture include providing in-orbit satellite capacity as an in-kind contribution through March 31, 2005; and a $10 million cash commitment that will not be made, according to an agreement between Intelsat and TVB, which agreed to release Intelsat from any future cash contributions.
Galaxy is licensed to provide pay-TV services in Hong Kong as well as teleport services. Combined, Intelsat and TVB originally agreed to contribute cash, transponder capacity and programming valued at more than $136 million to launch the venture. Intelsat’s transponder capacity was valued at the time at $16.5 million, while TVB’s programming was worth $41.6 million.
There is no agreement for Intelsat to provide Galaxy with further capacity beyond next March 31, and the announced agreement to exit Galaxy did not include the provision for TVB to pay any cash back to Intelsat.
The Timing Was Right
The scaling back of Intelsat’s activities made sense because its traditional business has been providing fixed satellite services, not operating direct-to-home satellite television platforms, said Steve Blum, president of the Tellus Venture Associates, of Marina, Calif., a satellite broadcasting consultancy.
The Galaxy venture required Intelsat’s financial support to get started, Blum said, and TVB would not have been able to launch the venture on its own. If Intelsat ultimately reaches an agreement with TVB to provide satellite capacity to Galaxy, Intelsat would have been able to create its own customer, Blum said. However, Intelsat has no guarantee of that happening.
“It is probably the right time for Intelsat to be backing out,” Blum said.
The decision to pull back completely on its commitment to TVB shows the “fragile state” Intelsat is in while awaiting approval of its sale, said Jimmy Schaeffler, a satellite consultant who heads The Carmel Group in Carmel-by-the-Sea, Calif.
The Hong Kong venture was an attempt for Intelsat to find a way to tap the Chinese market. “China remains a market with huge potential, and very few companies are deciding to withdraw,” Schaeffler added. “Rather, more and more are deciding to engage, especially with the China development that will come from the 2008 Beijing Summer Olympics, which are now less than four years away.”
Intelsat now has less flexibility and less patience to pursue risk-laden ventures than if it were operating as a “normal” company that was not going to belong to new owners focused on generating cash flows, he said.
The Gray Market
Galaxy is the only Hong Kong-based DTH platform, Blum said, but that doesn’t mean it is the only DTH service available in Hong Kong due to the existing gray market there. That gray market situation has spurred litigation between the various companies that provide service in Hong Kong from one point of origin in Asia or another, he added.
Asian DTH systems that provide DTH signals that people in Hong Kong can receive include Astro in Malaysia, Galaxy in Hong Kong, and UBC’s DSTV in Thailand, Blum said. Also available from main land China is a DTH pilot project, called CBTV, which is owned by CCTV, a state-run broadcaster.
Satellite-TV analysts expressed little surprise that Intelsat pulled back from its risky foray that faced formidable competition from “gray market” competitors in the region that lack official government approval to operate but that do so anyway.
Gray market service providers are legally authorized to operate in one country but their signals bleed over to another where it is not legally permitted to operate. However, it is problematic to prevent consumers from receiving the out-of-market signals, Blum said.
A similar situation exists in Canada, where a citizen can receive satellite TV programming from U.S. providers DirecTV or EchoStar Communications [DISH], since the signals stray well across the border.
“Hong Kong is sort of gray market heaven, since you have the availability of inexpensive receivers, combined with a market which, until Galaxy’s launch, did not have a DTH operator serving it legally,” Blum said.
(Steve Blum, Tellus Venture Associates, 831/582-0700; Jimmy Schaeffler, The Carmel Group, 831/643-2222; Dianne VanBeber, Intelsat, 202/944-7406)