Parlaying Huge Debt Into A Smart Business Decision

By Paul Dykewicz

PanAmSat President and CEO Joseph Wright, noted for his financial conservatism and cost-cutting, recently told me he isn’t worried at all about taking on a large debt load following the company’s purchase by financial investors. Interest rates are low, the terms obtained for borrowing are favorable, and the company is generating huge sums of cash to cover those debt expenses. With most of the world’s global satellite operators recently concluding or close to wrapping up major fleet replenishment and expansion programs, they are positioned to produce gushing streams of cash for the next several years.

PanAmSat is in a period of needing little cash for capital expenditures, Wright said.

“It is a window that allows us to leverage up,” Wright said. “That is one reason we received so much interest during the auction from private equity firms. Anything we do in terms of future investments would just add to that cash flow.”

With the cost of financing low right now, it makes sense in today’s debt markets to get a lot of capital, Wright added.

If the sector’s recovery comes as expected, particularly with increased demand for HDTV and government services, the prospects for private-equity firms buying fixed satellite services (FSS) companies appears quite good.

The latest financial results of the two biggest European satellite operators show they are able to produce steady cash flows even during times of weak demand. Attractive cash flows are a big reason why private-equity firms are investing in the industry aggressively this year. It also points out why substantial debt that has been taken on to pay for those acquisitions is not such a risky strategy when buying FSS companies, compared to acquiring businesses in more volatile industries.

With steady cash flows, the cost of paying interest on debt can be covered. The low interest rates now charged for borrowed funds also make taking on heavy debt loads feasible.

Tom Watts, the satellite analyst at SG Cowen, told me last week that the results of Luxembourg-based SES Global [SES] offered no surprises. SES is one of the few global satellite operators that haven’t been sold to private-equity investors this year. However, its budgeted capital expenditures to launch five satellites this year can be more than supported by cash flows from operations. That ambitious launch schedule did not prevent the company from recording free cash flow of $246.9 million during first half 2004. Without those same expenditures, free cash flow in the comparable period of 2003 was a whopping $882.9 million. What investor wouldn’t want such a company? Those enticing cash flows have been whetting the appetites of private-equity firms throughout the world that have bought or announced agreements to acquire PanAmSat, New Skies and Intelsat during the past six months.

Investors love steady cash flows that come from such predictable sources as long-term customers that include giant media companies and governments. FSS companies have such customers.

Paris-based Eutelsat is owned by a variety of financial investors that were cobbled together in recent years by the company’s Chairman and CEO Giuliano Berretta. His former telecommunications-company owners wanted to cash out, so Berretta astutely found private equity investors to buy each stake. The strategy allowed him to keep the Eutelsat management team intact.

Eutelsat also amassed a big cash flow it reported earlier this month when it announced results for its fiscal year ended June 2004. The company used its free cash flow generated by operations to cut its debt by 17 percent to 873 million euros (US$1.070 billion). The paring-back of debt puts the company in an extremely favorable position to take advantage of opportunities to capitalize when the sector recovers, Berretta said.

When the FSS sector’s most financially conservative CEO advocates taking on huge debt and calling it a smart business decision, it convinces me these are unique times. With interest rates at historically low levels and cash flow rising for virtually all the sector’s companies, it is little wonder why private-equity firms have been clamoring to buy them.

Paul Dykewicz is senior editor and senior analyst of Satellite News. He can be reached at 301/354-1769 or at [email protected].