Financial Experts Optimistic On 2008
[Satellite News – 2-19-08] In 2007, there were some interesting financial dynamics within the satellite industry. BC Partners struck a deal to acquire Intelsat. Abertis, a Spanish infrastructure company, was prepared to invest heavily to acquire strong stakes in European satellite operators, Eutelsat and Hispasat. In the field of MSS, many players believe this is a lucrative space and are looking to fund next generation systems. Satellite 2008 Show Daily spoke to Cowen managing director and senior research analyst, Tom Watts and Natixis Securities satellite equity analyst Eric Beaudet about the financial issues facing satellite players.
Satellite News: How would you assess the financial state of the satellite industry, given the increased competition in television markets from other platforms, as well the renaissance we are seeing in recent years from cable operators?
Watts: Generalizing about the ‘satellite industry’ always poses challenges, given its many different sub-sectors. Competition in the telecom sector comes from two different sources. First is the distribution of TV programming to cable headends in the FSS market. Second, is the direct distribution of TV to consumers using DTH platforms. Both of these applications will be around for a long time. While it’s possible to reach all the major metro markets cost effectively using fiber, the rural markets will never have adequate fiber capacity. Reaching those markets will require satellite. Once the signal is up on the satellite for the rural markets, all the urban markets can be served at minimal incremental cost. I do not see satellite going away any time soon.
The specific competition of DISH and DTV with cable and telcos presents and interesting challenge. Two years ago we expected the effect of the cablecos bundling video voice and data to have a bigger effect on satellite than it has. The satcos have done a brilliant job of continuing to differentiate their services, driving DVRs, HD programming, and other innovations into the homes of their subscribers, while tyinig up with telcos to bundle satellite TV with DSL. To date, the satcos have held their own. Even with minimal growth in the next few years, we look for free cash flow to grow substantially.
Beaudet: Although competition has intensified, I still feel the financial state of the satellite industry is healthy. Most companies have healthy debt levels and are generating a substantial amount of cash flow. As for their prospects, the development of HDTV is still in its infancy and should remain a growth driver for years to come. Moreover, the development of Internet connections via satellite will now give satellite operators new opportunities to better fend-off their new rivals, the cable and telecom providers.
Satellite News: Were you surprised to see BC Partners acquire Intelsat? Do you think this deal represents good value? Do you think satellite companies still represent strong acquisition opportunities for Private equity companies?
Watts: I can’t comment on the economics of the BC Partners deal. It does continue to point out that the public markets have a more difficulty time valuing a slow-growth cash-rich opportunity like Intelsat. We now see DISH and DTV moving towards the stage in their lives where they will throw off huge amounts of cash. I believe one cannot rule out PE activity for those operators.
Beaudet: I was surprised by this acquisition given Intelsat’s debt level. On the other hand, satellite service providers do represent opportunities for private equity groups as they have all the qualities private equity are looking for: visibility, strong cash flow generation and high Capex that gives them a certain leeway to increase cash generation if needed.
Satellite News: Do you think we could see AT&T acquire EchoStar? Will telecoms companies look to acquire satellite assets going forward?
Watts: AT&T has had a slight change of tone recently, suggesting they would look at DISH at the right price. I think the deal could certainly make financial sense. Strategically, it looks like more of a challenge. How does AT&T add value to all the DISH subscribers that are outside AT&T’s wireline footprint? Do they try to bundle with AT&T wireless?
Historically, satellite acquisitions by telcos have not had happy endings. Telcos focus on maximizing the value of their networks. Satellite never seems to get the attention it deserves. AT&T-DISH might be different. Overall, I don’t see telco-satellite acquisitions as an industry-wide direction yet.
Beaudet: Such a deal could make sense for AT&T. Indeed, the group has had quite a success bundling DishTV offering with its telecom services. Moreover, AT&T’s fiber optic network will only be able to reach 19 million households by 2009. EchoStar would then be a great fit to complete the coverage to regions not covered with fiber/ADSL. I am doubtful though on such acquisitions happening in Europe as the market is very fragmented. There would be very little reason for a telco operating in 2 or 3 country to buy a satellite company covering the hole of Europe.
Satellite News: David McGlade (Intelsat), Andy Sukawaty (Inmarsat), Matt Desch (Iridium). All these CEOs in the satellite industry have strong telecoms backgrounds. Do you think they are bringing more of a hard-nosed edge to the satellite industry? Do you think satellite companies will be better run by having these sorts of execs as they are maybe more used to dealing with the investor community?
Watts: I’m not ready to equate coming from the telecom industry as making executives ‘hard-nosed,’ implying satellite industry execs are soft nosed. For both Intelsat and Inmarsat, the job requirement for a CEO has changed dramatically. One of the previous requirement was dealing with the unusual structure and shareholder base of these companies. The past executives overcame a tremendous challenge, re-forming these companies. Similarly, Iridium had to be re-formed following its prior downfall. With all these companies beginning a new life, CEOs with strong operating backgrounds are the right individuals for the companies’ next stage of development. Also, we have to take into account the change in the markets that these companies address. For each of them, broadband is becoming one of their most important markets, parallel to the development in all telecom markets today.
Beaudet: You could add the CFO of SES on this list (ex-Belgacom). I do not think these CEOs are bringing more of a hard-nosed edge to the industry as financial discipline was already introduced by private equity groups in the 2003/2005 period and is now de rigueur in the industry. On the other hand, they will help to increase the exposition of the sector to the investor community as most investors are not familiar with the sector.
Satellite News: Which sectors of the satellite industry do you expect to perform strongly in 2008? Are you more or less optimistic than you were at the same stage last year?
Watts: I am more optimistic. DTV and DISH stocks have come down to interesting levels, and their cash flow prospects look increasingly tantalizing. The satellite radio companies, regardless of merger, are also moving to a huge cash flow inflection. Then we have the whole batch of new satellite technologies that finally are nearing the take-off point from an investment point of view. Geo Eye, Orbcomm, Iridium, Terrestar, Skyterra and ICO should become much more investable in the coming year.
Beaudet: I keep my optimistic stance on the sector ahead of 2008. Indeed, in difficult market conditions and with a possible recession coming our way, investors are running away from cyclical stocks. In that respect, satellite service providers could well benefit from the reallocation of money as they will not be directly impacted by a recession.