Eutelsat CEO: Everything Comes With A Price

European fixed satellite service (FSS) operator Eutelsat has rarely been out of the headlines in recent months. Last month, it saw the Ariane 5 fail to place its HOT BIRD 7 into orbit. Also, the company’s future ownership has been under the spotlight, with both Intelsat and PanAmSat apparently keen to acquire the company.

In an interview with Interspace Senior Editor Mark Holmes, CEO Giuliano Berretta talks about a replacement for HOT BIRD 7, changes in the European pay-TV landscape, Eutelsat’s evolving business model, as well as the “$64,000 question” – consolidation in the FSS space.

Interspace: When will a decision be made in terms of a replacement satellite for HOT BIRD 7? How will this affect your capital expenditure plans going forward?

Berretta: The decision has already been taken to commission a satellite that will replace HOT BIRD 7 and fulfil other requirements at 13 degrees East. Like any respectable company we had a contingency plan in place prior to the launch failure, but there is obviously more momentum in the decision process once a failure actually happens. We held substantial internal meetings before the Christmas and New Year break in order to reassess what had been planned and to consider some new ideas. The decision has now been taken and I intend to place a contract with industry in the first quarter of this year. I expect the satellite to be launched in less than two years. What we want is to incorporate the requirements for a replacement of HOT BIRD 1 as well as a spare for HOT BIRD 2.

HOT BIRD 7 was a replacement satellite, which means there is no issue of interruption to any broadcast services. The satellite was intended to contribute to consolidating our fleet at 13 degrees East. It was the least critical of the three satellites that we launched in 2002. The most critical was HOT BIRD 6 that we launched in August. This was important for us because we had experienced some reduction in power on HOT BIRD 5 a few years ago. In addition to replacing HOT BIRD 5, HOT BIRD 6 has increased by four transponders the amount of Ku-band capacity we have at 13 degrees East, enabling us to accommodate all the customers on the waiting list. Only one transponder is now unoccupied at 13 degrees East. We have also started Ka-band operations and are in fact the first operator in the world to associate Ka-band with on-board processing [SKYPLEX] which will open new opportunities for micro-broadcasting of television channels and meshed corporate networks.

The third satellite we launched was W5 that positions us to expand further to the East from 70.5 degrees East. I believe Eutelsat has a strong track record in identifying good orbital positions at the right moments. W5 is already almost 50 per cent occupied with 11 out of 24 transponders leased or in the process of being leased. The satellite went into operation on Dec. 30 and is performing very well.

Interspace: What ramifications, if any, do recent launch failures have on the space industry as a whole?

Berretta: I am very sorry for what has happened to Arianespace. They have lost a new launcher at a time of tough competition and I wish them all the best for recovering quickly. There are no Ariane 4 launchers remaining and there are few Generic Ariane 5’s available so I am concerned for our launch programme, which involves two important satellites, e-BIRD and W3A, both of which are due for launch by Arianespace this year.

The second point is the effect on insurers, although I must say it is more the Astra 1K satellite lost on the Proton mission which really hits the insurance community. Eutelsat’s arrangements to cover HOT BIRD 7 were made directly with Arianespace and included a free relaunch. We also arranged a separate, relatively small top-up. We will completely recover the cost of HOT BIRD 7 and plan to finance the new satellite through this reimbursement. What the loss does is to delay the realisation of some of our business objectives, in particular, further expansion into Africa. However, there is no significant economic effect in the short-to-medium term.

Interspace: One of the things that came out of the Satellite Europe 2002 conference, with particular reference to Astra 1K, is that some speakers alluded to the facts that these launch failures were good news for satellite operators as they were able to pick up insurance for satellites that may not have been as valuable as they once were. What are your opinions on this perspective?

Berretta:I am absolutely against the notion that losing a satellite can be an advantage in a market that is considered to have excess capacity. I am on the side of the positive people that retain belief in expansion. We have shown that at Eutelsat and we have successfully brought five satellites into service over the last 14 months. This is enormous expansion and sets us apart from most players in our sector. A launch failure for Eutelsat that believes in expansion is not good. However, as a big company with a substantial fleet, we can absorb the loss of HOT BIRD 7 with our existing capacity. I think you need to take a step back in looking at the current state of the space industry. The cycle for getting satellites into service is about three years and they generally now have a life expectancy of at least 15 years. This means you have to plan over a couple of decades, which is much longer than an economic cycle. I think you need to address our business in this perspective.

Interspace: What impact will the rapid consolidation in the European pay-TV sector have on Eutelsat’s operations going forward? How are the market dynamics changing here?

Berretta: Consolidation has happened or will shortly happen in three countries in Europe. Eutelsat has been involved in all three cases either directly or indirectly. We are indirectly involved in Spain through our investment in Hispasat. Presence in the Iberian broadcasting market was one of the motivations behind our investment in Hispasat and we believe that it would be a natural choice for a merged platform to be delivered to Spanish homes through Hispasat that provides the best coverage of the Iberian peninsula and the Canary Islands. We are directly involved in Italy with the new merged Sky Italia platform and share Sky’s optimism in the Italian market. Italy, after the UK, has the second highest number of dishes in Europe … Consolidation is economically logical in a country like Poland as the country is big, but not big enough to accommodate many platforms. In France I don’t believe we see real signs of a consolidation of the two platforms. We have a longstanding and strong relationship with TPS, which is now in its seventh year, and are very impressed by what they are achieving particularly in the area of interactivity. I believe rumours of consolidation actually lead to a negative subscriber market as it creates an environment of uncertainty.

Interspace: Considering the weaker economic conditions, what levels of growth are you looking for in your broadcasting business?

Berretta: We anticipate growth but not at the same levels as we have seen in the last years. In the last two years, we have had an average underlying annual increase in revenue in our broadcasting business of 10.4 per cent per year. If we compare this with our overall 13.4 per cent underlying growth rate in revenue, this means other areas are growing faster than TV. In addition to the consumer broadcasting business we are seeing big demand in capacity for professional video networks that include programme exchanges and satellite newsgathering. Beyond the European Broadcasting Union, which, with five full-time wideband transponders, is a major client, the market for video transport has increased by 17 per cent a year for the last two years in terms of revenues. This growth has partly been driven by increase in coverage to the Americas, Africa and Asia.

Interspace: Your overall revenues have declined from 729 million euros ($771.3 million) to 659 million euros ($697.2 million). How do you view the company’s financial performance for the most recent fiscal year?

Berretta: I am very pleased with the company’s performance and think it really stands out in the satellite sector. The fiscal year ended June 30, 2001, included certain non- recurring revenue that arose due to privatisation. Excluding this effect, our underlying revenue growth between the years ended June 30, 2001, and June 30, 2002, is 7.6 per cent. If you take the two-year period from the middle of 2000 to 2002, underlying annual growth is 13.6 per cent, from 510 million euros ($539.6 million) in 2000 to 659 million euros last year. What is even more important to look at is the EBITDA of 506 million euros ($539.3 million) in 2002. This is extremely high, beyond our forecast of 480 million euros ($507.8 million), and was achieved through tight control of expenditure. We expect single digit growth in our EBITDA in the current business year and to increase overall revenue in the region of 6 to 7 per cent.

Interspace: The company currently derives about 80 per cent of its revenues from the TV and broadcasting market? As this market is maturing, how do you expect the business model to evolve?

Berretta: We have been cautiously optimistic about the growth of broadband services. We are fully committed to the broadband market, although new services are taking time to develop. They need both reliability and market acceptance. We believe that broadband will account for 5 per cent of our revenues within our five-year plan. We have already reached 3 per cent of our total revenues with 20 million euros ($21.2 million) last year. I think the border between corporate networks and broadband is gradually disappearing. Combined, they represent a good percentage of our overall revenues. Corporate networks account for 17 per cent of our revenues and have seen a 36.7 per cent average increase per year over the last two years from 59 million euros ($62.4 million) to 111.2 million euros ($117.6 million).

Interspace: Considering Eutelsat is going to be targeting the broadband and video markets going forward, what impact do you think this will have on capacity utilisation rates?

Berretta: Our overall utilisation rate for satellites in stable orbit is 85 per cent, which I think must be one of the highest in our sector. We have more than 99 per cent utilisation for premium capacity, which includes the HOT BIRD satellites and EUROBIRD 1. The rest of the fleet in stabilised orbit has a utilisation rate of 75.5 per cent. We are seeing some very interesting applications emerging in the broadband market. For example, since the beginning of this year Italy’s Civil Protection Agency has been using two of our broadband services for multimedia links for rescue workers on the island of Stromboli that has been experiencing strong volcanic activity. In addition to basic voice links that were installed when the terrestrial network completely went down, our DSAT and DStar services are being used to transmit data as part of an early warning system for tidal waves and landslides. As the equipment used is compact and easy to install, terminals have been flown in by helicopter and set up within hours. I think this really demonstrates the ability to react quickly with technology that offers a full set of video, audio and data connections and that is reliable and scaleable.

Interspace: Are you looking to expand into different geographical regions? PanAmSat has recently been looking at a JV approach. Is this the type of approach that you would consider?

Berretta: We have two lines of growth. One is external, and can be demonstrated through the Hispasat investment and the Stellat transaction. Our second longstanding line of growth is organic. An important milestone was reached this way through the W5 satellite that positions us for substantial expansion to the East. I am concerned that in some areas there is a requirement for landing rights, particularly in China. We hope we can be supported by the European Union here as ironically Europe is one of the world’s most open regions but there are not sufficient reciprocal arrangements in other regions of the world. This could be an important activity for the ESOA [European Satellite Operators Association] that was created last year.

Interspace: Do you expect to see major consolidation in the FSS sector this year?

Berretta: This is the $64,000 question. Eutelsat has participated in consolidation activities through its participation in Hispasat and the Stellat acquisition. Smaller companies may be consolidated more and more. They suffer from a very strong discount on their value and may be the target of acquisitions by other companies. Eutelsat has been much discussed in the press over the last few months. This is not a result of consolidation but connected to our shareholders. Most recently, there was the Deutsche Telekom transaction with De Agostini and 21 Invest. It is a normal evolution that the shareholders of the company change.

Interspace: Is an IPO likely to happen this year?

Berretta: This depends on overall markets and it is hard to predict when they will recover. We are all hoping that the situation will improve and I would like to see the possibility for Eutelsat to conduct a listing whilst remaining open to other solutions that are also in the interest of our shareholders. I think we need to see two things: a recovery in the economy and a stable shareholder base.

Interspace: We are talking here right at the beginning of 2003. If we are to have a conversation at the end of the year, do you expect the company to still be an independent entity? It is no secret that bids have been made by both Intelsat and PanAmSat. How do you see the situation playing out this year?

Berretta: It is very difficult to predict. It depends on the offers in the market. It is clear that everything comes with a price, one way or another. I think the fact that Eutelsat has incited such enormous interest is a measure of its success. When you are one of the best companies in the market and you have shareholders that want to sell for whatever reason, by definition you become extremely interesting. I do not know whether a deal will be done or not. This will depend on our shareholders and the determination of potential buyers.

(Contact: Vanessa O’Connor, Eutelsat, e:mail: [email protected])