Financial Experts Bullish On Satellite Industry’s Prospects

It looks as if the telecom/dot.com depression that weighed down the satellite industry is over, and 2006 is looking good for attracting additional private equity (PE) and public market investment.

That was the message from financial experts who addressed attendees at the SATELLITE 2006 Conference Pre-Day program Feb. 6.

In fact, 2006 also looks to be a busy one in terms of continued consolidation of Fixed Satellite Services (FSS) companies, particularly for regional operators in Asia. "It’s not over," Andrea Maleter, technical director of Futron Corp., said. "The fat lady hasn’t sung yet."

Those FSS companies that put themselves up for sale will find buyers, said Philippe-Olivier Rousseau, managing director of the Media Telecom finance division of BNP Paribas. "Satellite operators are a paradise for private equity investors," he said.

On the one hand, FSS companies typically have 75 percent to 80 percent [earnings before interest, taxes, depreciation and amortization] margins plus "high and recurrent cash flow generation," making them highly attractive to investors. On the other hand, the global FSS fleet still has lots of life left, meaning that [capital expenditure] expenses should remain low until 2008 or 2009, he said.

Further fueling PE investor interest is their increased ability to buy companies using other people’s money. Previous leveraged buyouts have been limited to using only 70 percent debt financing, said Rousseau. But the times are changing, with private investors now raising up to 85 percent of the leveraged purchase price through debt, he said.

Those satellite companies that already are publicly traded should fare well on Wall Street. "We expect the VSAT industry to come back to investors’ interest," said Thomas Watts, managing director of institutional research for SG Cowen & Co. He pointed to the transformation of Hughes Network Systems VSAT operations into Hughes Communications, ViaSat‘s continued status as a top performing stock, and Gilat‘s return to profitability as the kind of news that makes stock buyers happy.

Meanwhile, now that DirecTV and Echostar "are generating huge amounts of cash," they may start buying back some of their stock. Such buybacks would boost DBS share prices and further burnish satellite’s reputation among investors. (DirecTV unveiled a stock buyback plan Feb. 8. See the Orbiting Wall Street column.)

Looking back at the 2005 PE investment wave, International Space University Chairman Ramin Khadem said that fears of PE-owned companies being stripped by cash-hungry investors proved to be unfounded. Khadem pointed to Inmarsat, as the company’s capital building program "went on unabated" after private investors took control of the company. This said, he expects PE-held firms to look for and find cost savings, especially in instances where two or more companies have been merged.

"These consolidations will lead to huge synergies" in areas such as administration, marketing and servicing, Khadem said. "But will they lead to major savings in [capital expenditures] and program development? Many have concluded that it’s got to happen, but I’m not so sure."

As for the future? Khadem predicted that high-definition TV will be a big factor in driving satellite usage. Meanwhile, he speculated that the PE investment flood of 2005 will be replaced by a "quiet wave" of activity in 2006, as investors try to build value (and prepare their exit strategies) through sales growth, further consolidation and vertical integration of satellite services with other related businesses. He added that an initial public offering could be on the way for Intelsat once the company completes its acquisition of Panamsat.

CSP Associates Managing Director Mark Oderman said that if 2005 was the year of the deal, 2006 will be "the year of the business plan" for PE-owned satellite companies, as investors try to make their acquisitions perform. Oderman also noted that, after years of hype during the 1990s, "convergence is here," specifically the extension of the Internet protocol (IP) format into all areas of video, voice and data.

John Janka, an attorney with Latham & Watkins, called upon the audience to "remember the doom and gloom that pervaded the satellite industry a few years ago," when so many cutting-edge satellite systems went bust. He then told delegates that such failures were actually cyclical in the satellite industry, with similar fates befalling the early C-band and Ku-band pioneers. "That’s part of the normal evolution of the business," he said.

"The early players … set a path for others to move forward on."

Today, with the success of satellite radio and the resurgence of satellite broadband, the cycle is repeating itself once again, Lanka noted. "Even Teledesic‘s long- abandoned 500 MHz spectrum is being opened up to new uses."

Given the panel’s bullish consensus of the market, Khadem’s advice to industry is to "sit back and enjoy the ride."