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Intelsat Aims To Enhance Value

By | November 17, 2003

      Intelsat is moving swiftly to complete its purchase of the North American satellite assets of Loral Space and Communications [OTCBB: LRLSQ] and its management is looking ahead to an opportunity to improve the weakening financial performance of those spacecraft.

      The outlook for Intelsat to finalize its purchase brightened considerably when the 10-day time limit expired for appeal of the bankruptcy court’s Oct. 30 order approving the transaction. As a result, the deal now can be expedited and completed as soon as year-end.

      One remaining condition to the transaction is approval from the Federal Communications Commission to transfer Loral’s FCC licenses to Intelsat. Expedited treatment from the FCC has been requested and Intelsat officials expressed optimism that the transaction could be closed as early as year-end.

      Once the transaction is closed, the assets would significantly enhance Intelsat’s geographic coverage and its presence in the broadcast video market.

      “I can see no reason why the FCC would not honor the request, and every reason for them to do so,” said William Coulter, a partner in the Washington office of the Coudert Brothers law firm.

      “This commission has gone to extraordinary efforts to eliminate unnecessary and burdensome bureaucratic steps to business,” Coulter said. “If Loral and Intelsat have agreed, and the court has concurred, then the public interest would seem to be well served by allowing the transfer to occur this year. Time is money and the user generally ends up holding the bag.”

      Upon consummation of the transaction, Intelsat would gain four in-orbit satellites, another spacecraft under construction that is expected to launch in mid-2004, and the corresponding orbital slots. Those assets would give Intelsat full coverage of North America.

      The satellites and orbital locations would complement Intelsat’s existing global network that currently includes 23 satellites, leased capacity on two additional satellites, five commercial teleports, strategic points of presence and fiber connections. As part of the agreement, Intelsat would acquire contracts with Loral customers in the cable television, broadcasting and private data networking segments.

      Loral, now operating under Chapter 11 protection, has been downsizing and its revenues from the satellites it operates over North America dipped between 2002 and 2003. The satellites currently have a backlog of roughly $460 million, Intelsat officials said.

      Conny Kullman, Intelsat’s chief executive officer, said he hoped that the financial performance of the satellites would improve under new ownership. Revenue for Loral’s North American satellites has been “trending downward,” he confirmed during a Nov. 12 conference call with industry analysts.

      “The Loral deal is not only a defining event for Intelsat but a landmark transaction,” Kullman said.

      Intelsat would become an attractive North American and global platform provider by purchasing the Loral assets. With industry-wide consolidation on the horizon, the acquisition would prove that Intelsat intends to be a serious long-term survivor.

      “The satellite services landscape is changing,” Kullman said. “The leaders operate on a global scale. Customers are demanding expanding service capabilities. With the Loral assets, Intelsat will be well-positioned to capitalize on the consolidation trend.”

      The Loral asset purchase also validates Intelsat’s commitment to enhance its geographic coverage and further diversify its revenue stream, Kullman said. The transaction is a clear indication that marketplace leaders will provide their customers with end-to-end connectivity on a global basis.

      “We are eagerly anticipating the expansion of Intelsat’s access to the North American market and are looking forward to providing Loral’s customers with a smooth and efficient transition,” Kullman said.

      Intelsat has aggressive plans for growth and expansion into new markets, such as video and entertainment, direct-to-home and broadband, said Susan Gordon, Intelsat’s director of corporate communications.

      “We need that optimism and excitement to get our industry out of the doldrums,” Gordon said. “The acquisition of the Loral birds will provide Intelsat with the resources it needs to jumpstart its strategies in the North American market.”

      The $1.1 billion purchase price for the Loral assets is subject to a number of price adjustments that will affect the final cash payment to Loral, Kullman explained. Specifically, Intelsat will receive a purchase price reduction for any net insurance proceeds from Loral’s $141 million claim for the loss of the Telstar 4 satellite.

      In addition, the purchase price may be adjusted downward based upon certain revenue and backlog-related performance thresholds, as set forth in the asset purchase agreement. The closing of the Loral transaction remains subject to the satisfaction of other conditions that are expected to be met within the same timeframe as the pending FCC approval.

      The original $1 billion that Intelsat agreed to pay for the Loral assets was boosted during the auction process to fend off a rival offer from EchoStar Communications [Nasdaq: DISH]. Intelsat agreed to raise the purchase price by $50 million if a customer contract currently under negotiation was signed by Loral. Intelsat also agreed to accelerate the payment of a $25 million performance incentive payment to Loral, as well as increase the base purchase price by $25 million.

      That brings the total price to $1.1 billion, before factoring in any upward and downward adjustments related to other matters.

      Intelsat also has committed to conducting an initial public stock offering (IPO) but is awaiting approval from the FCC to postpone the IPO until market conditions improve. Meetings between Intelsat and FCC officials took place earlier this month.

      “We have a high confidence level that we will have the extension,” Kullman said. The only objection to the extension came from EchoStar and that objection was later withdrawn, he added.

      Joe Corbett, Intelsat’s chief financial officer, said the company recently arranged for financing to complete the Loral asset purchase by selling senior notes. Intelsat also has a commitment from a group of banks to provide financial support.

      Further good news came last week when Loral announced that Telstar 13 successfully had completed its in-orbit testing. That satellite, one of the birds being purchased by Intelsat, now is operating at the 121 degrees West Longitude orbital slot.

      Telstar 13 was launched successfully Aug. 8 from Sea Launch’s Odyssey Launch Platform on the Equator in the Pacific Ocean. In a unique satellite sharing arrangement, EchoStar will operate the Ku- and Ka-band payloads on the satellite as EchoStar IX; while Loral – and ultimately Intelsat – will operate the C-band payload as Telstar 13.

      The Telstar 13’s 24 C-band transponders operating at 36 MHz will provide cable programming customers with coverage throughout North America, including Alaska, Hawaii and Puerto Rico. Telstar 7, the Loral satellite currently serving cable programmers, is operating nearby at 129 degrees West Longitude. Together, the satellites offer a robust satellite platform for cable programmers.

      –Paul Dykewicz

      (Conny Kullman, Intelsat, 202/944-7800; Susan Gordon, Intelsat, 202/944-6890; William Coulter, Coudert Brothers, 202/775 5100)

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