Cover Story: Satellite Operators: Connecting The Four Corners Of The World
Don’t believe for a minute they are merely capacity brokers, and whatever you do, be sure to refuse the notion that global satellite operators are past their prime, because a renaissance is under way. Indeed, the landscape within this industry niche is changing and what is likely to emerge will be a stronger team of international operators that will carry voice, data, broadband and Internet transmissions that will ultimately unite the countries around the world.
From consolidation to privatization and market expansion, the major players are feverishly working to remain competitive in this hot arena, making satellite operators one of the most active industry segments of this decade.
“FSS operators have very aggressive space segment expansion plans,” says Greg Lucas, managing partner of Regulatory Access/FCCfilings.com. “These companies must continue to evolve because customers increasingly expect global coverage and high-capacity connections to terrestrial networks.”
That transformation has begun. This need for global interconnection was a driving force behind a monolithic acquisition from a Luxembourg operator who broke out of its European borders and headed West. The business transaction made headlines and began a ripple effect that is still reverberating throughout the industry.
On March 28, 2001, Société Européenne des Satellites S.A. (SES Astra) acquired 100 percent of the U.S. operator GE American Communications Inc. (GE Americom) in a $5 billion transaction that is currently undergoing final regulatory approval. Once officially recognized, SES Global S.A. will emerge onto the industry scene and control all SES Astra and GE Americom operations–translation: roughly 20 percent of the current commercial geostationary communication satellites in orbit.
Consolidation: The Strategic Fit That Others May Follow
Even though they come from opposite sides of the Atlantic, the union between SES Astra and GE Americom could not be a more compatible one. For one, the companies join their diverse customer base. SES Astra has strong DTH relationships with European broadcasters, while GE Americom is popular among North American broadcasters, cable and private enterprises. The global fleet of satellites will cover Europe, the Americas and Asia as well as transoceanic capacity, offering seamless coverage and global connectivity. Together, SES Global will offer a complete spectrum of broadcast, video, broadband, multimedia, Internet and telecommunications services with a footprint that will shadow much of the Earth.
“Our objective will be to provide first class broadband content delivery to any place in the world,” says Romain Bausch, director general of SES Astra and newly appointed president and CEO of SES Global. “SES Global will be one of the few satellite operators that will really be able to bring the satellite solution to the dimension where they can compete in a bullish broadband environment.”
Bausch foresees that bundling of broadcast and broadband will be one of the key separators of satellite systems and truly pivot them in direct competition with terrestrial systems.
Naturally, this chain of events has Bausch’s colleagues re-examining their business structures and all eyes are on whomever will make the next strategic move. Will Eutelsat follow in its European counterpart’s footsteps and also acquire an American operator as some industry sources speculate? Time will tell, but one thing is for certain, consolidation will continue within this industry segment.
“We look upon consolidation as a healthy move for the industry,” says Terry Hart, president of Loral Skynet. “In general, I believe six global operators will remain and they will bring more value to the customer by more completely meeting their needs.” Hart adds that even though there are always discussions surrounding possible alliances for growing Loral Skynet, especially when the market is as stirred up as it is right now, “there is certainly nothing imminent [referring to an acquisition].”
Currently, Loral Skynet is moving forward with its service plans for Mexico and South America. “We have gained regulatory access within Brazil and now we are awaiting access from the Mexican government,” says Hart.
Regulations: Cutting Through The Red Tape
Regulatory obstacles within the Americas are not an uncommon occurrence for the satellite industry. But as more countries continue to de-regulate their telecommunications infrastructures, providers such as Loral Skynet will be able to more fully service their clients. “It takes time to develop landing rights and when they do finally open up parts of this market, healthy competition will begin,” Hart adds. “Obviously we think that all the agencies need to bring the walls down so we can better serve our customers.”
Another satellite operator that felt the affects of regulatory bottlenecks is Panamsat Corp. After months of wading through red tape, the U.S. satellite operator can now proceed with its business plan for Mexico. Panamsat de Mexico was recently formed through a partnership with Corporativo W.com S.A. de C.A., a holding company created by Alejandro Burillo, majority owner of the private equity investment firm Grupo Pegaso. The new company was granted a concession from the Mexican government on August 14, 2001, permitting it to serve as the reseller of all Panamsat services that require a satellite uplink within Mexico.
“Burillo basically believes, and we share in his belief, that the Mexican economy is essentially a wireless economy and is unlikely to go to a wireline economy anytime soon. The only way that broadband is likely to proliferate in Mexico is via satellite,” says Bruce Haymes, senior vice president, business development for Panamsat. “When you look at Mexico as the 12th largest economy in the world, and you see all the upsides of that market, getting in early provides us with a tremendous advantage over other players both terrestrial and satellite.”
In addition, Panamsat gained market access within South America as well. The Brazilian government granted authorization to the company’s PAS 1R Atlantic Region satellite to deliver video, data and Internet services throughout the country. Now Panamsat can deliver its global program distribution, Internet backbone connectivity, business communications and data services to Brazil. “This license gives us the opportunity to enter another strong market and serve the fast-growing telecommunications industry of the country,” Haymes says. Other markets Haymes is focused on include India and China.
“My vision for India is similar to Mexico in which this is another rapidly developing market with a strong desire to implement a communications infrastructure,” says Haymes. “It is our intention to announce partnerships in India within the next year that will bolster our market presence and position us to offer the kinds of solutions that a market like India requires.”
This regulatory headway recently made by Panamsat, however, did not materialize without a price. The company reported sharply reduced earnings for the second quarter and the first half of the year and cut back its earnings estimates for the remainder of 2001 citing, in part, these regulatory hurdles that took too long to overcome. As a result, Panamsat joins the ranks of other U.S. technology firms that took an economic blow this year and succumbed to downsizing and reorganization. The most notable switch came at the top when Doug Kahn abruptly left and was replaced as president and CEO by Joseph Wright, the former director of the Federal Office of Management and Budget. Industry analysts speculate that the naming of Wright to replace Kahn reflects the downturn of Internet business opportunities, and Panamsat’s probable sale. “Panamsat’s quarterly earnings echoed the issues that new capacity has been launched and results are poised to turnaround, however, expected investment in new in-orbit satellites did not materialize,” says Lucas. “Panamsat most likely will have to exit the Hughes umbrella if it is going to significantly grow in this competitive marketplace.”
Another significant change on the regulatory front also happened for a North American satellite operator. Telesat’s monopoly for the provision of FSS in Canada and for the Canada/U.S. border traffic came to an end. Now, a new regulatory framework is under way where competition may heat up in Canada.
In addition, Telesat jumped another regulatory hurdle in the last couple of years when the United States granted approval to place the Anik F1, Anik E1 and Anik E2 satellites on its Permitted Space Station List thereby enabling them to compete on a level playing field with U.S. carriers. Now the Great White North is eyeing its southern neighbor for market expansion.
“We have a big push for growing our presence within the United States,” says George Shafer, director, eastern region for Telesat. “This is a very attractive market for us because roughly half of the 12,000 earth stations Telesat currently maintains in North America rest within the United States. Telesat’s combined space and ground segment expertise makes us a very competitive end-to-end service provider in the North American market.”
Privatization: Shedding The Government Skin
The renaissance within the satellite operator community, however, does not stop either on the regulatory battlefield or upon the inking of an acquisition contract. Two industry juggernauts separated from government rule and recently privatized.
“This is another milestone in our development,” says Giuliano Berretta, director general of Eutelsat, which privatized July 2, 2001. “Our new corporate structure will also facilitate opportunities for external growth. With continued geographic expansion and more innovative and effective end-to-end solutions, Eutelsat will continue to be a major player in the global marketplace.”
And Eutelsat since has followed through on its word. The European satellite operator acquired a total of 21.15 percent with the potential to increase its stake in excess of 30 percent of Hispasat, Spain’s national satellite operator. “This substantial investment in Hispasat and the commitment to combine our strengths in the Amazonas satellite program is part of our expansion efforts,” Berretta says. Together, the companies will focus on developing new products and services with a particular focus on the broadband market.
According to Ignacio Gonzalez-Nunez, Hispasat’s deputy CEO, roughly 16 percent of their business comes from Internet delivery. “Most of this delivery is for enterprise markets and we are looking to grow at the pace the satellite industry grows, first looking at Europe and the Middle East and the Americas.”
On July 18, 2001, Intelsat completed its transformation for a treaty-based organization to a privately held company. Intelsat Ltd. emerged from the organization’s 40-year history in the satellite business as a competitive player on the global marketplace.
“One key in forming the new corporate structure was transferring our roughly $5.5 billion backlog with us,” says Conny Kullman, Intelsat’s CEO. “After 10 working meetings with roughly 50 participants, we struck a fine balance between our new and existing customers.” In other words, Intelsat executives remained sensitive that their existing customers did not want to find themselves undercut by lower prices to newcomers.
After much work on their concerns, Kullman believes Intelsat has arrived at an acceptable compromise between both sets of customers, giving his existing clients some protection for a number of years after Intelsat Ltd. officially launched operations. “We are anxiously looking forward to taking this next business step,” adds Ramu Potarazu, president and chief operating officer for Intelsat Global Services Corp. “Our clients are among the blue chips and we want to expand on that.”
Now, Intelsat Ltd. is positioned for growth and a possible IPO within the near future. Intelsat Ltd. is required by the terms of the ORBIT Act of 2000 to hold an IPO of its stock by the end of 2002. Kullman stresses that the law isn’t “driving this company” on that issue. Even if the ORBIT Act had required an IPO by the end of 2003, Intelsat Ltd. would still go ahead with the December 2002 timetable, he says, because it’s “the right thing to do” at this stage of the company’s development.
Going Public: A Risky Venture
Governed laws, though significant, may at times pose a business threat. Thankfully for New Skies Satellites N.V., both deadlines and market conditions played in their favor when the company went public. “When legislation adopts an arbitrary date, that is not helpful because it takes no reference as to what is feasible in the market conditions at that given time,” says Robert Ross, New Skies CEO.
In October 2000, New Skies successfully completed its IPO, selling more than 30 million shares and diluting the shareholdings of its Intelsat owners by more than 23 percent. Now, New Skies is focusing on growing its global market share within its core video distribution, Internet-related services and telephony applications. “In terms of growth, Internet is light-years ahead of all other segments,” says Ross. “All our segments are growing but the Internet is growing much faster. In fact, it has grown to 25 percent of our revenue in the past two years alone.”
New Skies received a boost toward strengthening its business model this past March when it too was granted full authority to serve customers in the U.S. market. Competition, however, is beginning to heat up as more and more non-U.S. operators continue to receive transmission rights into the U.S. market, and time will tell what significant profit segments New Skies captures from this region.
Unlike the favorable financial conditions that surrounded New Skies’ IPO efforts, Inmarsat Ventures Ltd. however, is still awaiting a financial upswing before completing its IPO. Due to adverse stock market conditions, the FCC granted Inmarsat Ventures Ltd.’s request to hold off on its required initial public stock offering until the end of the year. Without this extension, Inmarsat would have had to complete its IPO by July 1, 2001. Supporters urging the FCC to grant the extension included Inmarsat shareholder Lockheed Martin Corp., a major equity holder in Inmarsat as a result of its purchase of Comsat Corp.
The commission granted Inmarsat its first IPO extension last September, deciding that it had shown that it had prepared for the IPO, made itself attractive to investors and exercised reasonable business judgment to meet the goals of the ORBIT Act. Inmarsat sought the delay on the advise of its financial advisor, Morgan Stanley Dean Witter, which concluded that market risks were so high that it could not guarantee the offering could be completed.
“Even though Inmarsat has been ready to do an IPO since the beginning of the year, I have a diligence to my shareholders and I have to be cautious about going into a market that is not very hospitable to an IPO,” says Michael Storey, Inmarsat’s chief executive. “We continue to watch the market and are ready to go whenever the market characters are set.”
And in preparation for the future, Inmarsat is investing significantly–roughly $1.7 billion–in expanding its capacity through its next generation Inmarsat 4 satellites. “We have responded to the market demands for higher bandwidth capabilities and we are pushing the envelope with our new satellites ordered,” Storey adds. “However, it is a notoriously difficult business to anticipate market requirements three to four years away for satellites that will fly for 15 to 17 years.
“What makes this the riskiest business in the world is that you have to try and look 20 years into the future and provide functionality into those satellites, but Inmarsat has a good track record in achieving that,” Storey adds.
The Renaissance Continues
Whatever the near term has in store for the global satellite operators, consolidation, market expansion, privatization, public offerings and healthy competition will be the phrases uttered throughout this process. “It is only logical that these companies will have to continue with consolidation and expansion efforts in addition to business fundamentals,” says Lucas. “High-quality customer relationships, global coverage and competitive pricing are the building blocks for every satellite company that will survive in the ‘new’ new economy.”
Nick Mitsis is Via Satellite’s Associate Editor.