[Satellite News 03-04-10] In a move that consolidates the FSS sector in North America, EchoStar Satellite Services, a subsidiary of EchoStar, agreed to acquire an ownership interest Mexican satellite operator SatMex, EchoStar announced in late February.
The deal, performed in conjunction with MVS Comunicaciones, a Mexican media and telecoms company, is valued at about $374 million. Should it gain regulatory approval, the acquisition will give EchoStar a stronger position to exploit the demand for satelilte services in Latin America.
While admitting the deal is not necessarily guaranteed to receive approval, EchoStar Satellite Services President Dean Olmstead said makes a lot of sense for the operator given its presence in Mexico with the Dish Mexico pay-TV platform.
Satellite News: What is significance of the acquisition of Satmex?
Olmstead: From EchoStar’s standpoint, the significance of this acquisition can be summed up in three words — scale, diversity and depth. On the scale side, we would be adding three satellites to our fleet. We actually have 10 satellites today, so we would have a 30 percent increase in our fleet. In 2008, Satmex reported revenues of $114 million, so it would be a nice increase on the revenue side for us. Their other financial metrics are pretty good. They have pretty good EBITDA margin, at least up there with the industry leaders. So the scale is good.
The increased diversity is also very attractive to us in several ways. In South America, you have a diversity of markets. This acquisition gives us more exposure to South America and its economy, which is growing at two to three times the United States. There is diversity in the sense of third party revenues. Dish Network revenues have been important to us, but this will bring our reliance on Dish Network revenues down to less than 50 percent of our satellite services revenues, which is an important benchmark for us. There is also diversity in the types of services we will provide on the satellite. Historically, we have been focussed on video but, in South America, there is a lot of demand for what I would call infrastructure, such as cellular backhaul. Satmex will give us exposure to those growing markets. You also have emerging demand for satellite broadband. We have Ka-band capacity in the United States and we believe strongly in the consumer satellite Internet market. We believe there are tremendous opportunities to help and grow with the economies in Latin America.
The last thing I mentioned was depth. With Dish Mexico, we will now have multiple complementary businesses in Mexico, so we are not just a single string.
Satellite News: Are there any risks with this transaction?
Olmstead: There is a higher risk of not closing this deal compared to many other transactions. The bondholders have to approve the transaction. Right now, there is less cash to go around, so there could be some issues there in terms of how Satmex allocates cash to various debt and equity holders. A typical transaction has maybe a 90 percent chance of going through. This probability of success on this transaction is definitely less than that. It is decidedly more uncertain.
Satellite News: How did the deal come about?
Olmstead: Satmex had been working on this for some time. I worked on it in the last round two years ago when I was with Loral. Satmex went through a cycle. They were unsuccessful then as they had a minimum price which was too high. Following that, they brought a new management team in and shaped up their operations. They are in better shape now. I started looking at this in September last year. They were talking to other potential buyers. We engaged in the process and it looked attractive to us. We have been looking at it ever since.
Satellite News: Did your presence in the pay-TV market in Mexico influence your decision?
Olmstead: The deal does fit nicely. If you are looking at FSS acquisitions, this probably fits better than any other, or at least any others that were available. It is not just about Dish Mexico, but if you look at the slots, if you look at the assets that are being operated, then you see that we have five adjacent Ku slots, and I don’t think you find that anywhere else in the world. We would be at (approximately) 113, 115, 117, 119 and 121. There are some interesting things we can do with how we interlace the satellites between north and south to enhance their capabilities.
Satellite News: Will we see an aggressive capital expenditure program to take advantage of these slots?
Olmstead: We will certainly be active, and we will proceed with the replacement satellite for Satmex 5. We expect it to be a bit larger. Then we will continue to evaluate additional satellites in the ensuing months, we don’t want to get too far in front of our skis, but there are certainly great opportunities.
Satellite News: What are you plans for a Satmex 5 replacement?
Olmstead: The failure of the primary propulsion XIPS system is forcing the timing. Fortunately, the Satmex 5 generation of satellites was built with a back-up conventional fuel system which does provide us time to procure another satellite, but in this case, just barely enough time. We will have to do some creative work. We won’t make the announcement about ordering a new satellite; Satmex will. We are working hand in hand with them to make sure our ideas are fully taken into consideration. I think they will make an announcement in the next couple of weeks.
Satellite News: How will this impact the operations of Dish Mexico?
Olmstead: I think Mexico is a very interesting market. The United States is such a dominant economy, not just globally, but in the region, so Mexico can’t help but be heavily influenced by what is going on in the United States. That said, Mexico does have its own dynamics. It has a continually growing, emerging middle class that is demanding more consumer services. We see that in the success of Dish Mexico. In the United States, our multi-channel video market is a bit more saturated. Various providers are trying to steal market share from one another. The nice thing about the market in Mexico is that there is a lot of untapped consumer demand, so we are very bullish about Dish Mexico and similar types of projects. That spills over into our views on Satmex and its opportunities. We see Latin America as a very viable, vibrant set of economies that are growing, but not just growing in absolute terms but also growing in terms of disposable income. That is why, for example, cellular backhaul is a key market there. Consumer demand for mobile services is growing rapidly and cellular providers need solutions.
Satellite News: Are we going to see EchoStar commission a Ka-band satellite in Latin America?
Olmstead: We are definitely looking to bring Ka-band capacity to Latin America. We think it particular fits with EchoStar’s capabilities. As with Dish Mexico, we want to be exposed to the retail consumer market. We know how to do that. Broadband is very similar to pay-TV. Dish Network is a large distributor of Wildblue satellite broadband services in the United States so we understand the segment.
Generally, I am very bullish on Ka-band. When I was at Loral, I sponsored the development program that eventually became Viasat-1. I see broadband as a tremendous opportunity for the satellite industry and for users. We think satellites are the right answer for reaching these non-fibered populations, and there are a lot of these underserved populations. There is a continually emerging middle class around the world that wants broadband access but cannot get it. Satellite can deliver that capability quickly and cost-effectively. It does not have to be Ka-band, but it makes sense on a cost-effective basis.
Satellite News: When might we see an announcement on a Ka-band satellite?
Olmstead: I would say in the fairly near future, I would expect something this year, although it may be different from what you might be thinking of.
