Intelsat went forward with a long-awaited initial public offering in April dominated by defiant market conditions and challenges arising from the company’s own debt-laden capital structure. The Intelsat IPO went effective on April 18, with the company having reduced the offering price to $18 per common share on an offering of 19.3 million shares – about 19 percent of the company – raising $347.8 million and netting around $328.8 million after fees and expenses. The IPO therefore valued Intelsat at approximately $1.85 billion.
The company also sold 3 million non-voting preferred shares at $50 per share for an additional $150 million, netting $142.9 million. The preferred shares have a $50 liquidation preference and pay interest at 5.75 percent until May 1, 2016, when they automatically convert to common shares. The combined IPO brought the total net capital rise to nearly $471.7 million, with about 9 percent going to underwriters, accountants, lawyers and other advisors. The IPO was expected to close by the end of April and the company has announced that it intends to use substantially all the proceeds to retire existing indebtedness.
Intelsat’s private equity owners, led by BC Partners and Silver Lake Management, did not sell shares in the IPO. The private equity group acquired Intelsat in a 2008 buy-out from another private equity group in a deal that valued the company at about $5 billion. Prior to that, Intelsat had acquired PanAmSat, itself a company flipped a couple of times by private equity investors. Intelsat had originally planned an IPO of approximately $1.75 billion before reducing the intended capital raise to $750 million. The latest pre-effective suggestion was to sell 21.7 million shares at between $21 and $25 per share.
The levels of debt piled on Intelsat, however, make it all but impossible for the company to become profitable.
While Intelsat was unfortunate in the overall investor climate in which it went effective, given the terrorist attack in Boston two days before, concerns over China, North Korea and the dramatic drops in the value of gold and Apple, it is clear that Intelsat’s story did not resonate with investors, either. The company had very flat growth over the last few years (1 percent in the last year). In February, Intelsat reported a full year loss of $146.6 million on $2.61 billion in revenue and, as of March 31, it had $15.8 billion in long-term debt, the annual interest on which is approximately $1 billion. For a company that is already the largest player in a mature market, with one principal competitor, two major regional competitors and a number of minor regional competitors, it is a difficult story to tell.
None of this means that Intelsat has a bad business, that it is badly run or is deficient in a host of other ways. But the FSS market, long a mature, stable market with extremely high barriers to entry, long-term customer contracts and recurring, steady revenue streams (the very features that attracted private equity in the first place), has gone from a steady, if unspectacular, growth story to a flat growth story in the years of financial crisis. Growth in the 8 to 9 percent range five or six years ago was never going to excite early stage investors, but it was sufficient to service ordinary levels of private equity debt and provide private equity investors with the expectation of an exit event in five to seven years’ time. The levels of debt piled on Intelsat, however, make it all but impossible for the company to become profitable, given its status as already the largest player in a mature market. For a long time, the IPO was assumed to be the eventual magic exit from the debt load, but with a new valuation lower than annual revenues and a debt burden eight times that valuation, it is clear that the public market did not want to be the person left standing when the music stopped; the IPO was not the solution. The only possibility now would seem to be a restructuring, perhaps in the course of an acquisition. If not, Intelsat will go on operating and paying 40 percent of its revenues in interest.
Owen D. Kurtin is the founding member of New York City-based law firm Kurtin PLLC and a founder and principal of private investment firm The Vinland Group LLC. He may be reached at firstname.lastname@example.org.