Dollars And Sense: Intelsat-Panamsat

By Owen D. Kurtin

Earlier this year, this column devoted a four-part series to the earlier-than-anticipated exits of private equity purchasers of Fixed Satellite Services (FSS) companies into initial public offerings (IPOs). The announcement of Intelsat’s acquisition of Panamsat in the final week of August indicates a strategic consolidation of the sector – a very different kind of deal for the industry. What does it mean for FSS companies and other players in the satellite sector?

One interesting feature of the Intelsat-Panamsat deal was the way it took the sector’s best analysts by surprise, especially when factoring in the deal that did not happen. An Intelsat-New Skies tie-up had been rumored, but nobody seemed to have talked about Intelsat-Panamsat, except in a context of canvassing every possible permutation of combinations among FSS operators. Intelsat-Panamsat, when mentioned at all, was dismissed as a particularly unlikely, unstrategic combination. The two companies obviously did a great job of maintaining secrecy until the deal was announced, but the effort may have been helped by the industry-wide lack of expectation for the deal.

What did Intelsat and Panamsat know that nobody else did? Chances are that they focused not on how big a bite the transaction would be for Intelsat, but where the deal would leave the combined companies strategically. There has been a fair degree of post-announcement, 20/20 hindsight about how Intelsat’s core telecommunications service was in decline and menaced by terrestrial services and how Panamsat’s core video service both complemented and hedged against that decline. In addition, Intelsat probably decided that with industry consolidation inevitable, the ostensibly more manageable New Skies deal just would not do enough to assure Intelsat’s place at the table as a post-consolidation survivor among players like SES Global.

Panamsat also may not have had other potential acquirers. SES Global already has the Americas covered, particularly with SES Americom in the North American market. A Panamsat acquisition by SES Global would have raised serious and perhaps insurmountable antitrust issues with U.S. regulators, and the strategic advantage to SES Global would not have been clear. Eutelsat might have been an interesting fit, but Eutelsat is preparing its own IPO and may not be in the right part of its business cycle. Among non-FSS operators, the fit would be even less clear. New Skies itself may be a more likely target for one of the European operators.

The economics of the Intelsat-Panamsat deal are interesting, too. Intelsat is paying $25 per share of Panamsat common stock and will refinance or assume $3.2 billion in debt. In March, Panamsat went public at $18 per share and raised $900 million. The purchase price is therefore nearly a 40 percent premium on Panamsat’s IPO price of less than half a year ago. The deal also values Panamsat at 9.2 times fiscal 2006 EBITDA, a healthy, but not extreme, valuation in the sector. Intelsat’s decision to pay for Panamsat with cash only may reflect a decision to preserve its own multiples and hopefully enhance them in the wake of completing and assimilating the Panamsat acquisition in anticipation of its own eventual public offering.

The place of regional operators in the FSS firmament is key to future industry consolidation. Assuming that New Skies winds up with one of the other large global operators, what remains is a vital and even growing regional player market. While some of these regional players may be eventual targets, their regional models may be perfectly viable on a stand-alone basis. The FSS sector is likely to evolve into three or so global operators competing against each other for some customers and with a wide variety of regional operators for regional business. The different dynamics of those business models may pose unique challenges to the global operators in positioning their services differently in the global and local markets.

Finally, the Intelsat-Panamsat merger, whatever it portends for future operator consolidation, clearly puts more pressure on the satellite manufacturers. There will be fewer customers for them, even more bargaining power than existed already among the remaining customers and more pressure on margins in exchange for series of orders. The dynamics of manufacturer loyalty among operators in fleet replacement may change and become less "sticky." Given the tight margins already affecting the manufacturer sector, the pressure for them to consolidate may finally become overwhelming. Subcontractor manufacturers will also feel the pinch downstream.

The Intelsat-Panamsat merger is a different kind of event from those represented by the wave of 2004 private equity purchases and 2005 private equity IPO exits. Nevertheless, it represents part of the same continuum in rationalizing the satellite sector that began in the wake of the 2001 to 2003 abyss. The satellite business should be healthier for it.

Owen Kurtin is a partner in the New York office of law firm Brown Raysman Millstein Felder & Steiner LLP and a member of the firm’s Technology, Media & Communications and Corporate Departments. He may be reached at +1.212.895.2000 or by e-mail at [email protected].