Intelsat Struggles To Rebound

The revenues and expenses at Intelsat Ltd., headquartered in Pembroke, Bermuda, rose during its third quarter ended Sept. 30, while the global satellite operator simultaneously attempted to cut jobs in an effort to improve bottom-line results.

Improved profitability from continuing operations thus far has been elusive. Industry-wide overcapacity among the world’s satellite operators has squeezed profit margins and forced cost cutting among virtually all the companies.

Intelsat, a former intergovernmental satellite organization, also has the additional burden of attempting to transition from its one-time status as an entity with special privileges bestowed upon it by the governments that owned it to a private company. That shift has not been smooth, and further jolting changes at the company appear likely.

A key reason for any future change is that Intelsat management still needs to shore up the company’s financial performance. The purchase of the North American satellite assets of Loral Space and Communications earlier this year for nearly $1 billion is helping Intelsat to grow the proportion of its business that comes from higher-margin video services, compared to lower-margin telecommunications. But the overall bottom line for continuing operations worsened during third-quarter 2004, compared with the same period a year ago. To cut costs, Intelsat’s workforce of 981 people on June 1will be trimmed to 840 jobs by year’s end, marking a 14-percent reduction in force (RIF).

The most encouraging development for Intelsat during the third quarter was that its backlog of orders stabilized at $4 billion. The backlog had been diminishing during previous quarters, so the firming up of that financial indicator of future demand is an encouraging sign, said Dianne VanBeber, Intelsat’s vice president of investor relations.

Intelsat reported revenues of $266.2 million and income from continuing operations of $10.7 million for the quarter ended Sept. 30, fueled by increased lease sales revenues stemming from the company’s purchase of satellites from Loral earlier this year. The results compare with revenues of $235.1 million for the same period of 2003, when income from continuing operations reached $48.4 million.

The decrease in income from continuing operations of $38.2 million, or 78 percent, was due to higher total operating expenses and a $15.7 million rise in interest expense associated with the issuance of debt to fund the purchase of Loral’s North American satellite fleet.

Steve Symonds, a Wilton, Conn.-based satellite consultant, said Intelsat’s latest earnings report is something of a mixed bag.

“In all fairness, Intelsat is still a ‘newbie’ in the rough-and-tumble of the open marketplace,” Symonds said. “Still, these results indicate that Intelsat’s new owners would be well-advised to explore ways to cut variable costs and produce a better return on fixed operating expenses. More importantly, Intelsat needs to map out an effective growth strategy.”

That assessment of the fixed satellite services (FSS) marketplace is gloomy, even though Intelsat has been attempting to do more video services rather than fewer of them. Traditional telecommunications has tailed off more than demand for video services. In fact, video services may keep growing overall as high definition television rollout unfolds.

Jimmy Schaeffler, a satellite consultant who heads The Carmel Group of Carmel-by-the-Sea, Calif., said too much change in a short timeframe traditionally is a challenge. Intelsat endured plenty of change during the past three years and yet more is ahead.

Intelsat announced Oct. 10 that its shareholders approved the company’s sale at an annual general meeting held in Paris. The buyers include Zeus Holdings Limited, an investment vehicle of Apax Partners Worldwide LLP and Apax Partners Inc.; Apollo Management V LP; Madison Dear-born Partners’ MDP Global Investors Limited; and Permira Advisers LLC to acquire 100 percent of Intelsat. The private equity firms agreed to pay approximately $3 billion, or $18.75 per ordinary share, while assuming nearly $2 billion in Intelsat debt.

More than 99 percent of the votes cast on the matter, or nearly 85 percent of Intelsat’s total issued and outstanding ordinary shares, voted for the transaction. The approval of shareholders representing not less than 60 percent of the voting power of Intelsat’s total ordinary shares was required in order to approve the transaction.

This group of private equity firms most probably will expect and demand improved bottom-line performance and cash flows. “Its new owners will have a remarkably challenging time figuring it all out, that’s for sure,” Schaeffler said. “Expect lots more that falls on the controversial and provocative sides in the months ahead.”

Another positive step toward completion of the sale took place last Monday when President Bush signed a bill that amended the Open-Market Reorganization for the Betterment of International Telecommunications (ORBIT) Act. The amendment will remove a requirement that Intelsat dilute the ownership interests of its former signatories through an initial public offering. Instead, Intelsat could comply with the dilution objectives of the ORBIT Act by other means.

(Jimmy Schaeffler, The Carmel Group, 831/643-2222; Steve Symonds, 203/834-2766; Dianne VanBeber, Intelsat, 202/944-7406)