Multimedia Matters: From Concept To Cash Flow–No Guarantees In Guesswork

Theresa Foley

As satellite companies change hands, how does an investor know how much one is worth? Long-established Fixed Satellite Services (FSS) companies like Panamsat and SES are assigned the highest values these days. Former intergovernmental satellite organizations (IGO) are preparing to issue their first public stock. As they do, previous private transactions in which satellite ownership traded hands and Wall Street’s tools for comparing publicly traded companies are being used to analyze how much value these organizations have built throughout their lifetimes.

A few publicly known deals provide an idea of how much shares in the former IGOs have commanded in the past. In the first, Lockheed Martin (LM) paid $2.6 billion for Comsat, the former U.S. signatory to Intelsat, whose holdings included 24 percent of Intelsat, 14 percent of Inmarsat and 14 percent of New Skies Satellites N.V. (NSS). If one separated these assets out, an analysis of how much LM paid for its IGO ownership could be done, but it would be outdated because the price was determined largely by Comsat’s stock price two years ago, when the market was much stronger. Did Lockheed pay too much? The $2.1 billion charge it took in late 2001 when it decided to dismantle LM Global Telecommunications, with $1.2 billion for “impairment of good will” related to Comsat, would seem to say so. All of that equity plus LM’s holdings in other satellite ventures is on the block now, and if LM finds a buyer, the sale would provide a more current measure of the market value of Intelsat and other companies.

The second deal worth examining is the $490 million paid last year by Lehman Brothers for equity in four of the former IGOs. Lehman bought 70 percent of a holding company that now holds 21 percent of Eutelsat, three percent of Intelsat, two percent of Inmarsat and four percent of NSS. The relatively low price paid in this transaction discouraged other telecom companies, like British Telecom and Deutsche Telekom, from selling their own shares in the former IGOs after seeing how little Telecom Italia got, according to Stéphane Chenard, principal analyst at Euroconsult of Paris.

Chenard says a better way to value Intelsat and Eutelsat is to compare them with the SES Astra acquisition of GE Americom of 2001, a deal worth nearly $5 billion. Euroconsult is developing a benchmarking tool that will examine 50 to 60 financial criteria to provide another alternative for valuation.

But as the IPO process gets underway, investors are likely to turn to Wall Street to determine the value of Intelsat, Eutelsat and Inmarsat. William Kidd, Lehman Brothers satellite analyst, says Wall Street looks at the stage of a company’s development to help decide what kind of method to use in setting value, and satellites fall into three categories: concept, moderately developed and mature. Before a company has earnings or EBITDA (Earnings Before Interest, Tax and Depreciation Allowance), analysts like Kidd use theoretical models of “discounted cash flow” to predict the present value of largely theoretical future performance. Later, when a company begins to generate revenue and modest cash flows, the metrics and methods change. At this more developed stage, analysts increasingly use a formula called EV/EBITDA (Enterprise Value to EBITDA) which uses the ratio of total capital, including market capital and debt, to cash flow available to service that capital as a measure of valuation.

NSS, for example, had an EV/EBITDA multiple of roughly 4.8 times its estimated 2002 EBITDA, Lehman said in February. This was lower than the 5.5 value most FSS operators were trading at, and Kidd reasoned that New Skies’ smaller backlog of $631 million–equal to 2.7 years of future business compared to the industry standard of 5.5 years of revenue backlog–contributed to the lower value of NSS stock. The company’s small float and potential shareholder overhang were also probably additional considerations.

When a company matures, analysts generally move to price-earnings measurements which tend to focus more on shareholder returns, by looking at the ratio of shareholder’s capital to earnings available to shareholders. Although easier for analysts, for corporate managers, falling into this last category is far less exciting than the early stage when company managers can claim almost anything about future business and not be disproved. But this is where the new satellite stocks with their long history of operations and steady revenue streams most likely will end up.

Meanwhile, they all have broadband satellite initiatives. Even though hundreds of millions to billions of dollars have been spent developing broadband and multimedia projects across the industry, these services have little or no value until they go into service.

“New broadband projects do not have much asset value until an income stream is started,” says Roger Rusch, president of consultancy Telastra. He typically shows broadband initiatives as worth roughly $10 million before launch despite the massive investments in them. Investors would do well to be cautious, letting writedowns–like LM’s $400 million charge for Astrolink and Echostar’s $50 million write-off of its $116 million investment in Starband and Wildblue last year–serve as warnings that the broadband payoff is beyond their investment horizon.

The satellite industry still has only a small amount of public financial information on which to rely to make valuations, and much guesswork is involved. But with the number of public satellite stocks set to grow this year, the process should get easier.

Theresa Foley is Via Satellite’s Senior Contributing Editor