SatMex Staves Off Sale As Low Bidding Prompts Reconsideration

A week after Mexico’s predominant satellite service provider announced that the auction for its capital stock was being suspended, questions remained about an imminent sale.

On June 8, Satelites Mexicanos S.A. de C.V. (SatMex) announced that it was suspending its sale process and looking to reconsider its position.

The announcement came one day after French-owned Eutelsat Communications submitted an offer with two Mexican partners (Miguel Aleman Group and Clemente Serna Group) for 100 percent ownership of the company, which had put itself up for sale after a long debt restructuring. The other bidder was identified as Mexican magnate Moises Saba Masri.

SatMex’s government-appointed mediator declined to specify the amount of the two received bids other than to say the figures "were close," but nevertheless short of the $500 million minimum required by the equity trust agreement.

Thomas S. Heather, a partner with White & Case who was appointed by Mexico’s Communications Ministry in October 2005 to serve as mediator in SatMex’s restructuring, explained last week that while "the restructuring was designed for a resale of the company," the plan that had been devised since November left the technical committee’s hands tied.

"The equity trust agreement called for bids to be accepted in amounts between $500 million and $569 million," Heather said, "and the bids we received were below $500 million."

Given the shortfall, he added, "we decided to postpone [the sale] and discuss with the Minister of Communications other possibilities that may help to boost the value of the company, and also possibly refinancing the company or making a capital call. So we decided to postpone it for two weeks and see how we can work with our unit holder constituency."

Heather said the bids would remain on the table so that the technical committee could work with the bidders, or others who did not enter a bid but were otherwise interested.

"We will have a further board meeting and be letting alternatives be considered," he said.

Though the technical committee said it would review alternatives to a sale during the next several months, it added "there can be no assurance that this process will result in a sale transaction or enhanced value."

Heather, however, thought it "likely we will conclude eventually that the company will be sold, maybe in a multi-stage or two-step situation to strengthen the company and provide for SatMex-7."

SatMex-7, planned to be launched in 2010 to replace the aging Solidaridad-2 satellite, remains perhaps the company’s most valuable asset. SatMex currently operates three satellites, together providing complete coverage of the Americas from Argentina to Canada.

"SatMex isn’t going to be here in a year. They’ll be eaten by someone," said Max Engel, an analyst with Frost & Sullivan, who said he finds that the company’s presence over the Western Hemisphere should be particularly attractive to Eutelsat.

"SatMex wants very actively to be sold," he explained. "They have more spectrum than they’re using, so [potential buyers] have to ask are you talking the value of the satellites, or the real estate? I know that part of what was going on is that SatMex-7 should look attractive. Clearly they wanted to show that they have a satellite that would be a great asset to you."

Engel suggested that once SatMex realized that the asking price was not going to be reached, there ought have been a contingency plan in place to provide room for negotiations.

"There’s always room for some tweaking between neighboring satellites," he said.

Another question, Engel considered, would be why Eutelsat was ostensibly the highest bidder. Logically it follows that they saw the most value, he said.

"Eutelsat was buying into the North American market, and that should have been strategically worth a lot. [If] they buy SatMex, suddenly they have what SES does, what Intelsat does, and what Eutelsat right now doesn’t."

He said "when you’re talking about breaking into the North American market, I don’t think it’s a minor difference. It’s hard for me to believe that they would have turned down that opportunity for a little difference in money."

Luis Rebollar, chairman of SatMex’s board, said in a statement that "we believe SatMex is a valuable asset, and its management and board of directors are committed to constantly improving its operations, performance and efficiencies. We believe there are a number of opportunities available to SatMex that should help us maximize value."

Rebollar added "we believe the company’s existing capital structure that resulted from our successful restructuring [and] our current slate of independent directors has positioned us well to ensure SatMex continues to offer premier satellite services to our customer base going forward."

SatMex originally agreed to the restructuring in order to avoid an involuntary bankruptcy proceeding filed in May 2006 in the United States by the company’s U.S.-based creditors.

In June 2006, SatMex filed for concurso mercantil, a proceeding in Mexico similar to a bankruptcy proceeding in the United States, and by July the U.S. creditors had agreed to withdrew their bankruptcy petition in favor of the voluntary restructuring.

The May 2006 launch of Satmex-6 on an Ariane 5 ECA had been the most favorable news SatMex and the Latin American market had received in the recent past.

Previously, analysts at Aon Explorer forecast that the satellite market would continue expanding, growing to 694 transponders by 2014. Meanwhile they predicted a 3.2 percent compound aggregated growth revenue (CAGR) and revenues from operations expanding to $834 million by the end of 2014.

Within the next decade, Aon Explorer expected C-band services to remain strong in the Latin American region, though declining to 66 percent by 2014. Television was expected to continue to generate nearly half of the demand for satellite transponders, while the Internet share was forecast to expand to 39 percent by 2014.

In addition, industry analysts at Frost & Sullivan predicted that in the case of networking applications, the demand for satellite transponders most likely would stem from higher bandwidth requirements in videoconferencing, distance learning and telemedicine, especially within large countries such as Argentina, Brazil and Mexico.

"It sure looks to me like like two weeks is not enough to change the nature of the landscape." Engel said. "They have to be negotiating. Either they’re doing it for show – kind of a pro forma ‘yes we tried’- or they’re making a serious effort to bridge the difference and find another path."

He considered it a more sensible likelihood that SatMex and Eutelsat are "taking a breather to reassess the situation."

Engel explained "I keep going back to how in the world can Eutelsat let this get away?

"I don’t see anyone else for whom this makes strategic sense," he added.

"This is a really good chance to get into North America, and all their competitors have a much bigger footprint. Eutelsat might say ‘We’ll remain regional,’ but this is an opportunity that doesn’t happen very often."

— J.J. McCoy