EchoStar Hit Harder by Satellite Loss – Analysts

[Satellite News – 4-15-08] SES has confirmed the worst-case scenario for the AMC-14 satellite, declaring the spacecraft a total loss April 11. The loss is a blow to SES, but will create more problems for EchoStar, which had been banking on AMC-14 to help boost its high-definition (HD) strategy in the United States.
    AMC-14, built by Lockheed Martin Commercial Space Systems and under contract to EchoStar, was left short of its intended orbit March 15 by its Proton/Breeze M rocket provided by International Launch Services. While an initial assessment of the available options to reposition the satellite appeared encouraging, more detailed examinations by SES and Lockheed Martin engineers determined that the various scenarios could not provide a reasonable chance of success, SES said.
    For SES, the loss of the satellite represents only a “minor flesh wound,” Sarah Simon, a satellite equity analyst at Morgan Stanley who covers SES, said in an April 14 research note. “SES will receive within the next couple of months $150 million in insurance proceeds (equivalent to its contribution to the satellite build cost).”
    The problem is more severe for EchoStar, which will have “a shortfall in the capacity required to boost its HD offer, a shortfall that will be difficult to solve in the short term,” Simon said.
    A pair of launches planned before the end of 2008 should help solve EchoStar’s capacity issues, but “the question now is whether SATS, the company that was the direct lessee of the capacity (on behalf of EchoStar) will decide to order a replacement satellite from SES or will choose to buy and build a satellite itself. We think the third option, doing nothing, is unlikely given the need for more capacity for HD. We are unlikely to know this for a while, so have assumed in our forecasts that there will be no replacement for the AMC-14 project.”
    Ben Swinburne, a satellite equity analyst at Morgan Stanley who covers EchoStar, said, “The impact on EchoStar is to likely delay adding significant additional HD markets beyond the approximately 50 already deployed or announced until it launches two additional satellites in [mid-2008 and late fourth quarter 2008] respectively. We believe EchoStar’s poor gross additions performance in [the 2007 fourth quarter] was partially due to a lack of local HD market coverage relative to cable and DirecTV.”
    Despite this setback, EchoStar remains an attractive option for investors, Swinburne said. “We continue to believe EchoStar is attractive to long-term value investors and that we will see improving [year over year] top line fundamentals in [the second half of 2008. In addition to new local HD markets from new satellite launches, [yearly] churn and customer growth comparables get easier. EchoStar’s exposure to the economic downturn and its local HD challenges, we believe, are already reflected in its current discount multiple to the group. … While the loss is a net negative for EchoStar, the benefit of leasing satellite capacity versus the traditional U.S. approach of owning is to limit capital risk from satellite failures – a benefit realized in this case.”