Speculation Spikes About PanAmSat

Wilton, Conn.-based satellite operator PanAmSat [SPOT] has done so well managing it costs and boosting its cash flow during an industry downturn that it may be ideally situated to be sold by its new owners.

That view is shared by a number of satellite industry consultants and analysts who believe PanAmSat’s new parent, News Corp [NWS] has hired an investment banker to explore the possible sale of the satellite operator. In the past, News Corp’s top management had hinted PanAmSat could be expendable by describing it as a well-managed company that is not a core operation of its parent.

Indeed, Wall Street analysts have questioned whether the company might already be fully valued by the stock market. A recent report by Lehman Brothers rated PanAmSat between a “market performer” and a company to “underweight” in an investor’s holdings (SN, Jan. 26).

On the other hand, PanAmSat followed up earlier this month by meeting or exceeding all of the guidance it had supplied to Wall Street about its fourth quarter 2003 results. Joe Wright, PanAmSat’s CEO, said his company performed especially well when compared with its competitors.

For that reason, PanAmSat may have become an even more desirable takeover candidate. News Corp’s U.S.-based Fox Entertainment [FOX] also recently signed a long-term agreement to use PanAmSat satellites domestically and internationally to further boost the satellite operator’s value. If News Corp wanted to increase PanAmSat’s value in preparation of a sale, the circumstances likely could not be much better than they are now.

A sale in the near future “makes perfect sense,” said Steve Blum, who heads the Tellus Venture Associates consulting firm in Marina, Calif. “I think the bride is dressed and ready.”

Tom Watts, a satellite analyst with SG Cowen, also is expecting PanAmSat to be sold. “The chances of a deal being completed are very high,” Watts said. “We have a willing seller in the form of News Corp/Fox/Hughes Electronics [HS]. The only real question is how many willing buyers are out there. Several interested buyers could lead to an auction and a price in the $25-to-$30 range.”

Tim Logue, a satellite consultant in the Washington, D.C., office of the Coudert Brothers law firm, added, “I think the only surprise in this instance is how quickly things seem to be moving. What will be really interesting is who steps forward to buy the system and whether it will be sold in pieces or as a whole. Both economics and competition concerns, depending on the buyer, might dictate a breakup.”

Financial Buyer

It would not be surprising at all for PanAmSat to go to a financial buyer. London-based Inmarsat and San Jose, Calif.-based Globalstar recently were sold to financial buyers. Among the fixed satellite services (FSS) operators, none would be capable of buying all of PanAmSat right now. Intelsat is trying to digest its $1.1 billion purchase of New York- based Loral Space’s [LRLSQ] North American assets, and Eutelsat of France and SES Global [SES] of Luxembourg seem doubtful bidders during a time of industry overcapacity.

Wright anticipated that downturn, and he scaled back PanAmSat’s plans for building and launching new satellites.

In the company’s Feb. 3 earnings conference call, Wright said PanAmSat was one of the first to say the FSS industry was in a state of overcapacity, reduced pricing and flat-to- declining revenues. As a result, the company eliminated its risky research and development projects while focusing on matching its strengths to market-growth opportunities.

PanAmSat specifically pulled out almost $1.5 billion from its planned capital expenditures, and it reduced its operating expenses from more than $300 million a year to around $180 million a year for its FSS business, Wright said. As far as News Corp wanting to prep PanAmSat for sale, Wright was noncommittal.

He did, however, mention that News Corp Chairman Rupert Murdoch and Hughes President and CEO Chase Carey are going to be looking at all of their alternatives. “They’re in the process of doing that right now,” Wright said. “And, as you can imagine, I’m not going to comment any further on that.”

–Paul Dykewicz

(Steve Blum, Tellus Venture Associates, 831/582-0700; Tim Logue, Coudert Brothers, 202/736-1816; Tom Watts, SG Cowen, 212/278-4260; Kathryn Lancioni, PanAmSat, 203/210- 8649)