Eutelsat In No Hurry To Join FSS Consolidation Wave

Eutelsat ended 2005 in hectic fashion, closing the saga of its efforts to go public with a successful initial public offering (IPO) Dec. 2 after an earlier false start.

With Eutelsat now a publicly traded entity, it becomes the next focus of the consolidation efforts that have started in the Fixed Satellite Services industry, said Maury Mechanick, counsel in the Washington, D.C. office of White & Case LLP and a member of the firm’s Telecommunications, Media and Technology Practice Group. "The strategies and/or fates of virtually every major satellite operator came into much clearer focus in 2005, save for Eutelsat. As such, the spotlight in 2006 will shine directly on Eutelsat to see what it does to position itself in the rapidly evolving satellite marketplace," he said.

Eutelsat’s chosen path could include "formal consolidation or informal partnerships/alliances, horizontal expansion into new markets, or increased focus on currently-served markets such as video, but with greater emphasis on new technologies and applications," said Mechanick.

Sarah Simon, a media equity analyst at Morgan Stanley is among those that believe Eutelsat provides a strong investment opportunity. "We have a positive view of the global FSS industry, which is experiencing a significant upturn," she said. "… After a period of post-Internet boom doldrums, when the industry suffered from over capacity and low demand, the market has perked up considerably in the last 18 months." Simon believes Eutelsat is particularly well positioned. "Eutelsat looks attractive against this backdrop. In addition to being exposed to what we consider the most attractive markets, Eutelsat derives the majority (68 percent) of its revenues from video. Video is, in our view, the most attractive of the sub-segments because of the tendency for long-term contracts, which provide substantial revenue visibility and high barriers to entry for new players."

Eutelsat remains a strong financial performer, said Eric Elalouf, a satellite equity analyst at Deutsche Bank/ "In the past four years, Eutelsat has seen consistent growth in its revenues (by 4.4 percent per year between June 2002 and June 2005) while maintaining EBITDA margin above 76 percent, whereas most peers have experienced declines during the same period," Elalouf said in a report.

Eutelsat CEO Giuliano Berretta discussed the events surrounding the IPO, industry consolidation and the challenges that lie ahead for Eutelsat in 2006 with Satellite News international editor Mark Holmes.

Satellite News: What was your perspective on the unique chain of events that lead to your IPO?

Berretta: The decision to suspendthe IPO in October was driven by the downward turn in the capital markets environment since the launch of the offer, particularly in the [technology, media and telecommunications] sector. Our concern was notably to avoid a disappointing aftermarket for investors, which was the problem that dogged Belgian cable operator Telenet, which was trading at nearly 20 per cent below IPO price throughout October. Having said that, there was a great deal of investment already plowed into our IPO preparation and very strong interest from the investment community, so when the markets had improved one month later, the logical decision taken by our board was to quickly resume the process. Events proved our analysis was sound as the book was oversubscribed within 24 hours and trading began.

Satellite News: What are your views on the SES Global/New Skies deal and its potential impact for Eutelsat?

Berretta: We are not in the race of who buys most. Our main objective is to maintain profitability which, with a 77.1 percent EBITDA margin, is the highest in the FSS sector. In terms of satellite capacity we have already reached a critical mass, which means that an acquisition is not indispensable, although the door is never closed to opportunities that could bring synergies while keeping profitability high. Our key focus is to build up premium neighborhoods, notably 36 degrees East, 7 degrees East and 16 degrees East, to match our Hot Bird and Eurobird 1 positions and to leverage the revenue potential of value-added services through our satellite capacity.

Satellite News: If Intelsat is forced to divest certain satellites to complete its acquisition of Panamsat, particularly those with North American coverage, would Eutelsat be interested in acquiring them?

Berretta:While we plan to pursue our longstanding strategy of organic growth, we continue to look at opportunities for external growth. The question of possible divestiture of Intelsat satellites following the merger with Panamsat is still too hypothetical. In terms of assets over North America we will look at routes that could enable us to diversify the connectivity we provide to the eastern seaboard of North America and most of South America with our Atlantic Bird satellites. In particular, the Amazonas satellite operated by Hispasat, of which we are the leading shareholder, provides an excellent North American footprint from 61 degrees West. which is a promising neighbourhood for the domestic U.S. market.

Satellite News: What impact will the merger of Canal+ and TPS in France have on Eutelsat?

Berretta: This is the third merger of pay-TV platforms we have seen in Europe, so we have garnered some experience on the subject. The first, in Poland, concerned the combination of UPC’s Wijza TV platform with Canal Plus which necessitated the repointing of 350,000 antennas to our Hot Bird neighborhood from Astra’s 19.2 degrees East location and changing set-top boxes. Considering labor costs and the estimated 20 per cent loss in subscriptions in the transition process, I frankly think it difficult to imagine an operation larger than this one being undertaken.

The second merger took place in Italy with the combination of Telepiu and Stream (both platforms already on Eutelsat). The important message here is that, contrary to expectations, the new platform, Sky Italia, did not reduce its bandwidth requirements – it increased them. To support Sky Italia’s ongoing expansion, which includes HDTV, we last year concluded with them a far-reaching contract for up to 10 new Hot Bird transponders.

The third merger, in Spain, resulted in the combined platform continuing broadcasts on Hispasat, of which we are the main shareholder, and Astra. Considering that transport costs for a TV platform represent about 4 percent of overall costs, I believe that the example of Spain, where subscriptions are protected, makes sense and that maintaining the merged French platform on both locations could actually benefit Eutelsat.

Satellite News: We have seen satellite pay-TV operators branch into the TV over DSL arena. BSkyB has acquired Easynet. CanalSat is gaining 20 percent of its new subscribers via DSL. What implications does this have for satellite operators? Do you expect satellite pay-TV operators to, in essence, become triple play operators, and look to buy telecoms assets?

Berretta: The prime objective for TV companies is to win and keep viewers, whatever the technology. They are consequently looking at multiple distribution platforms to gain audience. I have three main observations on this. First, that by leveraging different distribution platforms, programmers are in stronger financial shape and this benefits their chain of suppliers from [set-top box] manufacturers to bandwidth providers. Second, even Europe’s most advanced pay-TV countries have not yet reached 50 percent market penetration, which demonstrates the scope for growth in Western Europe, not to mention the substantial untapped potential in Eastern Europe, the Middle East and Africa, where we offer a strong footprint from a number of video neighborhoods. Third, as the number of broadcasting platforms grows, the ubiquitous coverage supplied by satellites puts them in a unique position for content delivery to headends in parallel to directly serving homes in non-urban regions.

Satellite News: How do you see DTH services developing in Central and Eastern Europe, especially the impact of satellite broadband in areas with lower DSL penetration rates?

Berretta: Eutelsat decided over 10 years ago that the potential of Eastern Europe and the particular technical features of the region justified investment in dedicated satellite capacity for DTH reception. We designed a satellite called W4 with high power over eastern Europe that met with very precise parameters in Russia in terms of frequencies and polarisation. Fifty percent of W4′s capacity is optimised for Eastern Europe. and it is now the region’s leading broadcast neighborhood. The satellite serves two anchor pay-TV platforms: NTV Plus in Russia and the recently-launched Poverkhnost in the Ukraine.

With a population in Russia of around 150 million people and 50 million in the Ukraine, our belief is that there is further potential for new platforms, maybe in partnership with western corporations. We continue to consolidate our market position in Central Europe, most recently with a new contract with Serbia Telekom which is targeting the expatriate community via Hot Bird’s extensive footprint. At 16 degrees East on our W2 satellite, we also recently contracted with Serbia Broadband (SBB) which is launching a new DTH platform for the Balkan region. SBB’s arrival on W2 reinforces this satellite as the strongest neighbourhood in Central Europe, with Albanian, Croatian and more recently new Romanian broadcasters.

Satellite News: Many expect that 2006 will be the year when HDTV makes a big impression in Europe. Do you expect that to be the case?

Berretta: Market predictions indicate that in Europe there could be around 30 HDTV channels broadcasting by end 2006 and around 150 in 2010. I believe HDTV will rollout in a series of steps. This has already begun with seeding the market with HD-Ready displays and will continue with the arrival of HD DVDs and broadcasting of key events delivering the premium content. One of the highlights for 2006 will be the World Cup in Germany, followed by another big wave in 2008 with the Olympic Games in Beijing.

Satellites will be quick to benefit from the move to HD, both in terms of contribution links from live events and direct broadcasting to TV viewers. Eutelsat has already concluded an agreement with NHK for HD contribution for the Turin Winter Olympics. Four pay-TV operators that use our capacity have announced HD launches: Sky Italia and TPS from the Hot Bird neighborhood, BSkyB from Eurobird 1 and Poverkhnost from W4.

Satellite News: Do you think satellite broadband initiatives across the world will have an influence on Europe’s acceptance of the service? Considering explosive broadband penetration growth across Europe, what role can Eutelsat play in this arena?

Berretta: We play an active role in delivering satellite broadband services in Europe including in Western Europe, where multiple technologies are frequently mobilized to meet national broadband projects. The work we are doing in Ireland with Smartcom is a good example. In order to provide high-speed broadband access to 2,000 Irish schools the Department of Education selected both ADSL and Eutelsat satellite capacity. One of four schools concerned by the programme has been equipped with Skylogic’s D-STAR product. We have seen the same dynamic in the Italian regions of Piedmont and Tuscany where Skylogic Italia is providing the satellite component of public broadband programmes.

In addition to Europe, where ADSL nevertheless creates a fiercely competitive environment, we are pursuing opportunities in Africa where new business has been secured with Algerie Telecom, Divona Tunisia, Orascom and Al Harbi, and the Middle East with capacity for VSAT networks leased to Omantel. Our broadband affiliate, Skylogic Italia reached profitability in 18 months, which I believe is a considerable achievement in the FSS value-added sector. As far as broadband-specific satellite programmes are concerned, we favor a model based on allocation of capacity over multiple telecommunications satellites, which enables us to respond to market developments and changing regional demand with maximum flexibility.

Satellite News: What role will Eutelsat play in Galileo and the government services market in general?

Berretta: We are actually in quite a unique position in Galileo-type services through our Euteltracs mobile service, which provides messaging and positioning for more than 30,000 trucks in Europe, Africa and the Middle East. The new generation of Euteltracs terminals are using GPS for positioning, the present equivalent of Galileo.

In terms of government services, which we classify as opportunistic dependent on external events and characterised by short-term contracts, we are in a good position. Being quick off the mark to provide coverage in areas where demand emerges is key issue for this activity. With time, other satellites and technologies inevitably follow, building a much more competitive dynamic. It is an interesting part of our business, although we still consider our core activity to be video, data and value-added services.

Satellite News: What are Eutelsat’s capital expenditure plans in terms of new satellites?

Berretta: Our capex expenditure for the coming three years is 900 million euros ($1.1 billion).It includes two broadcast satellites: Hot Bird 7A, which is due for launch on Feb. 21 and Hot Bird 8 in the second quarter. These two satellites will raise in-orbit sparing for broadcast clients (currently 850 channels) at our 13 degrees East neighborhood. They will also permit the redeployment of Hot Bird 4 to 7 degrees West.

Over and above the two Hot Birds, we have initiated work on three new satellites, W2M, W2A and W7, which we expect to launch from 2008 to replace existing satellites and increase total in-orbit capacity. W2M, which will substitute W1, is taking priority in the procurement program in order to bring capacity at 10 degrees East back to levels prior to the incident on W1 in 2005 which resulted in a 50 percent loss of capacity. W7′s mission will be to replace Sesat 1 in the 2010-2011 timeframe to address high demand for capacity for broadcast and broadband services at 36 degrees East which has become a key location for Africa. Our objective is for W7 to double capacity into sub-Saharan Africa, Europe and Central Asia and to release Sesat 1 well before its end of life to an alternative location. The third satellite on the drawing board is W2A, whose mission is being finalized.

Satellite News: What are the major challenges facing Eutelsat and the major growth opportunities for the company over the next 12 to 24 months?

Berretta: With the analog conversion already largely behind us, the major opportunity for us will be the continued evolution of standard digital television in Europe, the Middle East and Africa, the roll-out of HDTV, growth in broadband in developing countries, and mobile communications. When I say mobile I mean Euteltracs and also communications in-flight, on trains and cruise ships, markets which we believe have substantial untapped potential. Skylogic Italia recently created a new joint venture company with Maltasat International, called WINS (Wideband Interactive Network via Satellites) to extend GSM connectivity and Internet access to locations lacking other means of communications, particularly cruise ferries – the first boats are already being equipped in the Mediterranean.

Contact, Vanessa O’Connor, Eutelsat, e-mail, vo’connor@eutelsat.fr Maury Mechanick, White & Case, e-mail, mmechanick@washdc.whitecase.com; Sarah Simon, Morgan Stanley, e-mail, Sarah.simon@morganstanley.com; Eric Elalouf, Deutsche Bank, e-mail, eric.elalouf@db.com

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