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KKR Eyes PanAmSat Growth

By | April 26, 2004

      The cost-cutting and restructuring that sometimes follows Kohlberg Kravis Roberts & Co. (KKR) acquisitions instead may be replaced by a cautious growth strategy upon completion of its planned purchase of Wilton, Conn.-based satellite operator PanAmSat [SPOT].

      PanAmSat is a satellite industry video giant that transmits more than 2,100 broadcast TV channels globally. KKR is a financial investor that typically acquires companies with the expectation that their value can be increased to prepare them for later sale. SATELLITE NEWS previously had predicted that PanAmSat would be sold to a financial buyer, not a competitor. The company’s management believes its acquisition by KKR should allow the satellite operator to significantly expand its capabilities.

      The $4.3 billion deal for PanAmSat showed KKR’s confidence that the satellite operator has better days ahead. The sale price of roughly $23.50 a share also includes the assumption of $750 million in net debt. The offering price was below PanAmSat’s closing stock price of $24.79 a share Monday. The stock closed Tuesday at $23.30 a share, down $1.49 a share or 6 percent.

      PanAmSat’s attractiveness was reflected by 18 prospective bidders successfully making it through a first cut that required each contender to verify it possessed the financing to pursue a purchase, said Jim Frownfelter, PanAmSat’s COO. Frownfelter, speaking during a conference call Tuesday to hundreds of PanAmSat customers who had gathered for a breakfast during the National Association of Broadcasters (NAB) conference in Las Vegas, said PanAmSat management had “complete control” in selecting the winning bidder.

      18 Bidders

      The original 18 contenders were winnowed down to five finalists that went through detailed due diligence of PanAmSat, Frownfelter said. The list then was cut to two on April 14, and KKR emerged as the top choice by the end of that week, he added.

      Frownfelter told SATELLITE NEWS Senior Analyst and Senior Editor Paul Dykewicz that KKR was chosen from among the vast pool of prospective purchasers in part because it shared a philosophy similar to the operator’s management to grow the business. Part of KKR’s commitment to PanAmSat could come in the form of supporting the spending of “significant amounts of capital” for new infrastructure, he added. Resolution of PanAmSat’s ownership also should strengthen the satellite operator and bring it stability.

      However, the public statement issued by KKR as part of the sale was vague about how much freedom and financial resources the PanAmSat management team would have to operate and to grow the company.

      Alexander Navab, a KKR official, spoke about PanAmSat possessing a strong operational foundation, broad customer base and significant technological resources. What Navab did not offer were any specifics about possible ways to grow PanAmSat, how firmly KKR supported management’s strategic plan of “prudent” expansion and what the new owner might do to enhance PanAmSat’s position as a global provider of video and data broadcasting services. He also did not include any commitment to keep PanAmSat’s current senior management team.

      During the past few years, PanAmSat arguably has been the global satellite operator most focused on slashing costs, on boosting free cash flow and on enhancing the company’s current value. Under the leadership of its President and CEO Joe Wright, PanAmSat previously undertook extensive job-cutting aimed at streamlining and improving the financial performance of its business.

      PanAmSat’s management has a much better chance to remain in place with a financial buyer than if the satellite operator had been acquired by one of its industry rivals. If two satellite operators had been combined, redundant positions would have been created and significant cost-cutting to trim the duplication almost inevitably would have occurred. Those past expense-reducing actions should preclude more than a modest number of further job losses once the deal is concluded.

      The deal is subject to applicable approvals by regulators, including the Federal Communications Commission, as well as by stockholders. If everything goes according to plan, the transaction should close in the second half of this year, Frownfelter said. The boards of directors of both PanAmSat and The DirecTV Group – the News Corp [NWS] entity that currently controls PanAmSat — voted unanimously in favor of the sale.

      Credit Suisse First Boston served as financial advisor to The DirecTV Group, while Evercore Partners did likewise for a special committee of PanAmSat.

      The DirecTV Group, formerly known as Hughes Electronics, currently is an 80.5-percent shareholder in PanAmSat. However, DirecTV Group publicly had disclosed its interest in selling the company to raise cash and to focus on its core satellite TV service, DirecTV. The DirecTV Group, 34-percent owned by News Corp business unit Fox Entertainment Group, is based in El Segundo, Calif., along with its U.S. satellite TV operator DirecTV.

      As part of the transaction, The DirecTV Group agreed to “extend and enhance” certain agreements with PanAmSat, at market rates, company officials said. The intent is to assure future revenue flows to PanAmSat and continuity of services for The DirecTV Group subsidiaries, Hughes Network Systems and DirecTV Latin America.

      Strategic Alliances

      KKR officials have expressed support for PanAmSat’s focus on the entertainment, communications and government sectors as well as its efforts to grow by developing new products and services, forging strategic alliances and developing new markets, Wright said. The sale puts PanAmSat on “excellent footing” to build to the future, he added.

      PanAmSat officials are “looking forward” to an on-going relationship with The DirecTV Group companies as customers and affiliates, Wright continued.

      DirecTV Group President and CEO Chase Carey said PanAmSat’s sale is “a significant step” toward transforming the former Hughes Electronics holdings into a single business focused on DirecTV, the nation’s largest digital multichannel television service. The KKR offer provided the best value to the PanAmSat shareholders among the various alternatives, he added.

      D.K. Sachdev, a consultant who heads Vienna, Va.-based SpaceTel Consultancy, said The DirecTV Group’s desire to focus only on satellite television made it practically a “foregone conclusion” that PanAmSat and, possibly Germantown, Md.-based satellite data services provider Hughes Network Systems would be sold.

      Roughly half of PanAmSat’s fleet is over the Americas and the rest spans Asia Pacific, Europe, Middle East and Africa, Sachdev said. A purchase of PanAmSat by KKR raises interesting possibilities that may include the new owner operating the network “for some time” with a view toward increasing its market value or ultimately selling parts of the network to multiple regional operators, he added.

      “Either way, the infusion of fresh capital in the industry should be good news for the manufacturing industry, perhaps through additional satellite orders by The DirecTV Group,” Sachdev said.

      PanAmSat’s sale to a financial buyer also may spur consolidation among other satellite operators as they attempt to position themselves for the future.

      With the economy showing signs of recovery, the time may be ripe for PanAmSat to pursue growth opportunities that had been delayed during recent months while it was negotiating with potential acquirers. Indeed, the company intentionally had limited its risk during the past six months to avoid raising concerns among any of its prospective bidders. –Paul Dykewicz

      (Kathryn Lancioni,PanAmSat, 646/293-7415; Robert Mercer, The DirecTV Group, 310/726-4683; D.K. Sachdev, SpaceTel Consultancy, 703/757-5880)

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