Boeing Exec Casts Doubt On MSS Strategies

[09/05/07 – Satellite News] Industry leaders continued to debate the state of the satellite industry today at Euroconsult’s World Summit for Satellite Financing in Paris. Panels today looked at the influence of Private Equity (PE) firms in the satellite sector, the opportunities for regional operators, and the state of play for satellite manufacturers. All panelists had an optimistic view about the state of the industry and the opportunities for the players involved.

Stephen O’Neill, president at Boeing Satellite Systems International, was also the second industry heavyweight after Andy Sukawaty, Inmarsat’s CEO, to question whether a number of Mobile Satellite Services (MSS) players would survive. In some of the most interesting comments of the day, O’Neill said,  "I think our industry is in the middle of a Harvard business case. When I look at the MSS market, I am certain 2-3 companies have the wrong strategy. However, I am not sure which ones. But, it is still a fascinating market.”

PE

In a panel titled, ‘Private equity funds/investors and the satellite/telecom/media secto,"  a variety of panelists analyzed how attractive satellite investments were for PE type companies. Richard Davis, principal at VantagePoint Venture Partners, a company that has helped finance ProtoStar, outlined some of the metrics it used when investing in the satellite sector. He commented, "We look for deals that are transformative and ambitious. Satellites are very good at broadcasting. I am still skeptical about satellites in point-to-point applications. I like to see broadcast type applications. We invested last year in ProtoStar. The thesis is there is not enough high-powered Ku-Band capacity for DTH in Asia. With ProtoStar, what we finally did, was come up with a financial structure, where they sold 40 percent of the satellite before we invested in the company. These are the types of things we look for.”

Jim Pittman, vice president at PSP Investments, a Canadian pension fund company outlined why they had decided to become involved in the Telesat/Loral deal. He said, " A lot of things we like about the satellite industry are things such as free cash flow, synergies, heavy asset backed protection, long dated contracts etc. Strategically, we like the ability to support a company with intrinsic growth. We can see a lot of strong growth within the Telesat deal. I think basically what we plan on doing is closing the deal and gaining the number of synergies and doing them straight away.”

In terms of whether it is looking at future satellite investments, Pittman added, "We will look at further acquisitions in the near future, but it is a little early to talk about it.”

However, as the credit crunch begins to bite, we could see more merger and acquisitions (M&A) activity in the satellite sector. Nicolas Massard, principal at Spectrum Equity Investors said, “PE firms have to become more realistic. There will be more traditional lending. I think we will go back to sensible leverage levels. Lenders will revert back to where they have control of the company. We (PE firms) have really bought a real rerating in the satellite industry. Going forward, valuations will not be fuelled by leverage levels but will have to rely on free cash flow yields and other valuation metrics. But, I think leverage will still be available to the satellite industry. However, As LBOs (Leveraged Buyouts) slows down, we may see more strategic M&A activity in the satellite sector.”

Interestingly, Massaud also thinks telcos may get more involved in the satellite space. He added, "I would not be surprised if the telcos came back into this industry because they feel that need to have satellites to reach the masses.”


Regional Operators

Dominating your region is the way forward for smaller satellite operators. This was the main message to come from the panel titled ‘Growth opportunities in regional satellite markets’. Peter Jackson, AsiaSat’s CEO commented, "Global operators can provide a global solution and around the world satellite connectivity. But perceptions are changing. Users are educated about the low cost terrestrial options. Users require the best satellite fore each region/country. Operational cost saving do not necessarily flow through price. Regional operators can exploit advantages and value of coverage and penetration.”

Some of these regional markets are very buoyant and seeing increases in demand for capacity. Khalid Balkheyour, Arabsat’s CEO said demand for operator’s capacity in the Middle East was strong. He said, “We have rebuilt our pricing model and build flexibility into it. Our fifth generation satellites are already receiving serious enquiries. BADR-6 pre sales are ahead of target.”

Poh Kwee Lin, director of business development and solutions at SingTel Satellite said IPTV was also fuelling demand for satellite capacity in Asia. SingTel, Singapore’s largest telco launched IPTV earlier this year. Lin commented, “IPTV is driving demand for new TV channels. IPTV will create more demand for transponder demand but the increase will be slow and steady.”

In Latin America, Gustavo Silbert, StarOne’s CEO, said the company had numerous growth opportunities. He said, "We have strong growth opportunities in GSM backhaul, digital TV, distance learning, social inclusion, DTH telco and cable. We also see governments are working do deliver broadband solutions throughout the region using satellite.”

All the panelists believed consolidation was unlikely with smaller regional operators. Lin said, “I don’t think there are many national candidates available for consolidation. Many smaller national operators are tied to national interests.”However, more cooperation between regional operators is likely. Jackson added, "Regional satellite operators are here to stay. I think you will see more allegiance between the operators.”

Satellite Manufacturing

In the panel titled ‘Bigger market and tougher competition for satellite manufacturers’, satellite manufacturers from both the U.S. and Europe engaged in a lively debate about the state of the satellite manufacturing landscape. Most satellite manufacturers painted a bright picture in terms of satellite orders in recent times. Pascale Sourisse, CEO of Thales Alenia Space, said, "We are happy to see that 2007 has been a very good year for Thales Alenia Space. We are glad to see the market recovery in 2006 has continued in 2007. We think it will remain at the same level for the years to come. Our view of market trends is quite positive.”

John Celli, president of Space Systems/Loral (SS/L) was equally effusive saying, "We have seen a spectacular rebound in the satellite industry starting last year.”

Sourisse also dismissed the notion that there was a trend in the industry to move towards smaller, low-cost satellites and said that the company was seeing demand for all types of satellites. She commented, "We have kept hearing that operators want very small, simple, dumb satellites. What they want is a variety of different things. Some are looking for more complex type satellites, particularly if they are addressing the HDTV or mobile TV markets. They want complex payloads. There are opportunities for many types of satellites. We have a product range that is addressing a large part of the market.”

While the market may be buoyant, competition between the companies remains intense. However, despite this, Evert Dudok, CEO of EADS Astrium said the time was now right for the company to put prices up. He said, "With the capacity filling up, the next bids we will put in, the prices will go up.”

The topic of vendor financing and credit conditions was also bought up. Celli admitted that SS/L would not rule out doing further vendor financing in the future. He said, "We have provided vendor financing and we would be prepared to do it again. But, it is not a widespread requirement. I don’t know if the credit crunch will have repercussions in the market.” Sourisse said the company was seeing less demands for it to get involved on the financing side. She said, "Our new customer in the UAE (Yahsat) has strong financial resources. We are simply a supplier. We are seeing far less requests than we did ten years ago to get involved in the funding of contracts."