SES Global-New Skies: Cash Or Stock (Part I)

By Owen D. Kurtin

The announcement Dec. 14 that SES Global agreed to acquire New Skies Satellites for approximately $1.16 billion in cash and assumed debt capped a transformative year in the satellite operator sector. The first half of 2005 was dominated by the initial public offering exits of the private equity firms that bought into the sector in 2004; the second half by the consolidating merger and acquisition activity represented by the Intelsat-Panamsat and then SES Global-New Skies deals.

SES Global agreed to pay $760 million in cash, or $22.52 per share for New Skies, a discount from New Skies’ previous day closing price of $23.50, an interesting price point considering that New Skies had reportedly rejected a few prior SES Global bids. SES Global is also assuming and restructuring approximately $400 million of New Skies’ debt.

The New Skies deal fills different strategic needs for SES Global. On the geographic coverage level, it adds Latin American and Indian Ocean region coverage to the SES fleet. It also expands SES Global’s telecommunications and Internet service; SES Global’s current revenues are primarily from video broadcasting. In that sense, the deal is the mirror image of the Intelsat-Panamsat deal, in which acquirer Intelsat’s telecommunications strength is to be married to Panamsat’s video broadcasting coverage.

Both deals, however, are alike in using cash, not the acquirer’s stock, as acquisition currency. In Intelsat’s case, the reason was likely so as not to dilute Intelsat’s share price in advance of its own initial public offering. SES Global is already public on the Luxembourg and Euronext Paris exchanges. However, the considerations for using cash or stock as acquisition currency are related, whether a company is public or private. This column examined the pricing and valuation dynamics of IPOs in 2005; as our industry consolidates and matures, it is timely to discuss the financing choices that face acquirers in merger and acquisition activity in a few, not necessarily consecutive, articles.

All other things being equal, a seller prefers to receive cash, not stock, and at closing. Any offer of cash acquisition currency should carry a discount to what the offer in stock would be; any offer of cash at closing should carry a discount to what post-closing payouts would be. Post-closing payments, however structured, are always in some measure contingent, if for no other reason than by risk of the purchaser’s insolvency or bankruptcy, as any investment banker or lawyer should tell his or her seller, or "target," client.

Therefore, in an all cash deal, the acquirer is accepting all the risk, both in market change in the target’s stock value prior to closing and in its operation of the target after closing. However, when the parties agree on a stock as currency deal, the risk becomes shared, either for the pre-closing or post-closing period, or both.

When the parties agree on a stock transaction, they must decide between two main variations. In a "fixed exchange" ratio structure, each of the target’s shares is converted into a fixed number of the purchaser’s shares based on a negotiated "exchange ratio." The number of shares to be exchanged is fixed, as is the resulting percentage ownership of the target, but the overall value of the deal may fluctuate with movements in share price prior to closing. Fixed exchange ratios are most common in "merger of equals" transactions, since both parties equally share the risk of share price movement; however, the risk is particularly acute for target’s shareholders, who may be faced with a drop in the acquirer’s share price prior to closing. Fixed exchange deals are also common in telecommunications and other technology sectors, based on perceived sector volatility and sellers’ resulting position that volatility risk in their stock price should be shared.

In a "fixed value" transaction, it is the exchange ratio that floats and the value of the acquisition consideration that stays the same; the percentage ownership of the merged company is unknown until after closing. Typically, a formula provides for measuring the purchaser’s stock price during a negotiated period of days or weeks prior to closing or the meeting of target stockholders to approve the transaction. A fixed value pricing formula insulates seller’s shareholders from market risk prior to closing; the acquirer and its shareholders bear all the market risk. Fixed value deals are common when one party is clearly acquirer and the other clearly target, rather than in "merger of equals" contexts. Also, hostile bidders tend to use fixed value structures because they have more appeal for target shareholders.