Will Private-Equity Owners Stay The Course?
It’s been a hectic year in the satellite sector, with some of the biggest operators in the business now sporting new ownership. Private-equity (PE) firms that have acquired stakes in such satellite operators as Intelsat, New Skies Satellites [NSK] and PanAmSat [SPOT] are likely to stick around for as long as five years as they look to gain returns on their investments, at least according to a number of high-profile satellite finance experts at the recent Euroconsult 8th World Summit For Satellite Financing in Paris.
These sales to PE firms happened relatively quickly. Kohlberg Kravis Roberts & Co (KKR) acquired PanAmSat in a $4.3 billion transaction (SN, April 26). New Skies announced it was to be acquired by the Blackstone Group in June for $956 million in cash (SN, June 14). Last month, Intelsat announced that it was to be acquired by a consortium of private investors, including Apax Partners and Permira, in a deal worth around $5 billion (SN, Aug. 23). In terms of selling these assets down the road, Mark Piegza, managing director, media and telecom banking at Banc of America, commented, “I think the private- equity investors will be in there for a period of time to justify buying these assets. Typically, they will have two-to-five-year horizon. I don’t expect them to exit over the next couple of years.”
Max Herrnstein, a managing director at Morgan Stanley, shared that view, saying, “I would not expect a quick flip with these assets. They are not in the business to trade. Private-equity companies will be involved in these companies for several years.”
Added Charles Harman, managing director of corporate finance at Cazenove, “Financial sponsors will exit in the medium term, if not before. Exits may be achieved through industry consolidation, IPOs, recaps or sales to other financial sponsors. When they do sell, the likely opportunity is consolidation or an IPO. At that time, we can hope that the fixed satellite services (FSS) sector will be in a better position to deliver revenue growth. Although the industry is ripe for consolidation, it will probably be slower than people think. It will take time.”
More Deals, IPOs?
Financial buyers were eager to invest their capital. The satellite companies met their investment criteria, including long-term contractual revenue streams, free cash flow (FCF), predictable capital expenditures, etc. The expected FCF generation was a factor. All the operators are expected to spend materially less on capital expenditure going forward.”
Gilles Gantoris, senior banker of telecom at Calyon, added, “We are speaking about operators today who will be there tomorrow. It is a relatively simple business model. There are fewer parameters when you compare the satellite sector to telecom, for example. You also have good visibility on cash flows. There is certain predictability of capital expenditure and operating results.”
There could be more deals ahead. Tracy Mehr, managing director/media and telecom investment banking at Credit Suisse First Boston, said, “These transactions should clear the way for further consolidation in 2005. I expect 2005 to be as exciting as 2004. You could see opportunistic combinations in the next 12 months between first- tier combinations or first- and second-tier combinations. I also think you will see a major transaction within nine months.”
Despite tough economic conditions and an environment where revenue growth has been slow, the heavy investments by PE firms indicate the FSS sector has appeal. Mehr commented, “It has been an active year in the satellite sector. Many of the financial industry believed there would be consolidation; they were half right. It has been a year of shareholder turnover. There were not many strategic buyers.
While satellite operators have been considered solid investments, the acquisitions by PE firms could also indicate a level of difficulty in terms of taking these companies public. Tom Watts, managing director of SG Cowen, said, “Public investors have less flexibility to lever the company up. They also have less patience. Public investors have a lot more alternatives and more opportunities. PanAmSat went public in 1995 at $17; the share price was $23.50 in 2004. The New Skies IPO was at $9 in 2000; the takeout was at $7.96 in 2004. People have not made a bundle from the satellite industry.”
Herrnstein added, “It has been a great turn of events for the industry, when you consider the possibility of Intelsat and Inmarsat IPOs.”
While many say it is good news that PE firms have invested in the satellite sector, it could spell trouble for the satellite manufacturers. Many in the financial community warned that satellite operators’ capital-expenditure plans could be cut back drastically as PE firms look to implement greater financial discipline. The satellite- manufacturing industry, already a tough place in which to do business due to the number of players, could be hit still further.
“There will quicker decision making with private-equity people on board. They want 20-percent returns,” Herrnstein commented. “There will be a lot less capital expenditure. The name of the game could be turning a 15-satellite fleet into a 10 satellite fleet.”
Piegza added, “Operators will focus on debt reduction. Consolidation will wait until there is debt paydown. I think there will be a lot of focus on operators’ better managing spectrum. You could see swaps of assets.”