Global Satellite Operators Face Ownership Dynamics
By Ramin Khadem
Apax Partners and Permira, arguably two of the most respected private equity firms in Europe, started a minor revolution with their purchase of a controlling stake in Inmarsat nearly a year ago. Until then, the satellite sector had not seen effective control of major satellite operators by private investors. True, the private-equity group Eurazeo had acquired a piece of Paris-based satellite operator Eutelsat during early 2003 but that resulted from individual minority shareholders opting for liquidity, rather than the outright sale of an entire company.
That minor revolution, formalized in December of 2003, soon fanned out and spread to PanAmSat, Intelsat and New Skies during 2004. Thus, within the span of a year, four global operators were owned by private equity funds.
A key impetus for selling stemmed from a desire by such large telecommunications companies as British Telecom, France Telecom and Deutsche Telekom to liquidate their stakes in such satellite operators as Inmarsat and Intelsat. Those two operators previously were intergovernmental satellite organizations before they privatized within the past few years. Deterioration in the telecommunications industry caused the companies in that sector to improve their balance sheets. An opportunity to raise substantial cash and to reduce heavy debt loads was too enticing for these telecommunications companies to pass up. All of the investments of these telecommunications companies were candidates to be sold. The question boiled down to what was the fair market value for those holdings.
The private-equity investors possessed the significant funds needed to buy the operators to reap the healthy cash flows and high Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) margins typical of satellite operators. It is ironic that Intelsat and Inmarsat, founded by an international treaty when no private investors could justify these ventures, became so successful that private investors went head-to-head to buy them out. That twist alone is an indication of a coming of age for the satellite sector and a tribute to the early visionaries who saw merit in creating intergovernmental satellite organizations that would operate worldwide.
In the absence of valuations established by public stock markets, the point of reference no longer is quite as clear. The best guide for estimating what these companies might fetch if taken public through initial public stock offerings (IPOs) or sold in the future would be comparable public companies.
Inmarsat was acquired at a valuation of more than five times EBITDA. Several months later, both Intelsat and New Skies were sold at a multiple of around seven times EBITDA. Are those fair values? You bet. Values are determined by the market and in these cases private equity investors competed against each other to acquire the companies. Clearly, the market sentiment towards the satellite sector improved with the completion of the Inmarsat sale. The valuation of the other companies rose in the subsequent deals.
The question often asked is what happens now if any of the acquired companies do not perform as expected or are weighed down by high leverage and cannot achieve sufficiently high returns to cover the expense of carrying that debt. In either case, costs may have to be squeezed further to offset not only the servicing of debt but, more importantly, to reduce net debt levels. Uppermost in the minds of the investors and the bankers who finance the transactions is how net debt reduction matches or exceeds their own projections. In sum, the next challenge will to create value from these investments.
Value creation is not static, and it must rely on the plans of the future. There has been much talk about a general cutback of new satellite orders, postponement of launches and a general period of slowdown for suppliers. While each of these expectations may prove true, it should not be forgotten that the fixed satellite services (FSS) sector has endured a period of capacity oversupply that pre-dates the recent acquisitions. The overcapacity has existed for more than two years. A chronic oversupply in the face of lackluster demand requires its own medicine. It is widely known that the oversupply in the FSS sector has had the effect of spurring price discounting for in-orbit transponders and reducing margins further.
In the mobile satellite services (MSS) sector, the prospects look brighter than on the FSS side. Investors in Inmarsat have publicly espoused their belief in the prospects for the company’s next-generation satellite program and its related broadband data strategy.
So what will be the impact of the private-equity acquisitions on the industry as a whole? Thus far it is clear there will be a rebalancing of supply and demand, tightened cost controls and a postponement of programs that are not absolutely needed. These changes ultimately will lead to further consolidation in the industry. But what is important to note is that these dynamics would have been at play regardless, albeit with a reduced sense of urgency. The danger will be in not looking beyond the next two to three years to anticipate the need for additional FSS supply beyond that time frame. Any such oversight would leave operators vulnerable to missing the next wave of growth opportunities.
Ramin Khadem is a consultant in the satellite sector as well as chairman of the board of trustees at the International Space University in Strasbourg, France. Contact him at Ramin Khadem@hotmail.com.