Dollars & Sense: Inmarsat-Eutelsat
By Owen D. Kurtin
Early last year, we predicted that just as the story of 2004 was the entry of private equity firms into the satellite operator sector, the story of 2005 would be their faster- than-expected exits through initial public offerings (IPOs) and otherwise. It was not much of a prediction, but it proved accurate. The operators concerned were Panamsat Corp., purchased by Kohlberg Kravis Roberts, The Carlyle Group and Providence Equity Partners; New Skies Satellites Holdings, purchased by The Blackstone Group; Intelsat, purchased by Apollo Management, Madison Dearborn Partners, Apax Partners and Permira Advisors; Inmarsat, purchased by Apax and Permira; Eutelsat Communications SA, which preceded the 2004 wave in private equity ownership, went through a series of private equity ownership changes late in 2004 and is now owned by Eurazeo S.A., Texas Pacific Group, Goldman Sachs Capital Partners, Spectrum Equity Investors and Cinven Ltd.; and Globalstar L.P., purchased out of Chapter 11 proceedings by Thermo Capital Partners.
Four of the six went public in 2005. The IPOs of Panamsat, which went out first in March 2005; New Skies in May and Inmarsat in June have been successes. Inmarsat in particular: since it went public on the London Stock Exchange, the stock has risen 30 percent in the aftermarket; a spectacular result for Apax and Permira.
As we went to press, Eutelsat which, citing adverse market conditions, withdrew its IPO in the last week of October, after twice repricing its shares and lowering its planned raise from up to $1.67 billion (an amount roughly comparable to Inmarsat’s initial market valuation), went into the market in early December for a raise of just more than $1 billion. The company cited better market conditions. What explains the different trajectories of the Inmarsat and Eutelsat IPOs?
Of course, company fundamentals do and should play a role, but that role should be fully accounted for in a transparent and informed market by the decision to go public in the first place and the pricing and flotation decisions. In theory, at least, if an IPO is withdrawn, the market either changed late in the process or was misjudged. There was some negative market change in the last few weeks before Eutelsat’s initially planned October offering, but no obvious drastic market improvement in the intervening month when the company went public. Markets, of course, in reality are not perfectly transparent and informed.
Some analysts are pointing to Inmarsat’s use of a so-called "competitive IPO" as a reason for its success in gauging the market in price, timing and flotation. Inmarsat put a number of investment banks through a beauty contest before selecting JP Morgan Cazenove and Morgan Stanley to prepare the prospectus and added Lehman Brothers and Merrill Lynch as bookrunners. The investment banks’ fees were tied to various benchmarks, including investor commitment, encouraging the banks to drill down deeper on market demand, flotation and price. In addition, Inmarsat’s IPO was the first satellite offering on the London Exchange, and there was no issue of investor fatigue. In the case of Eutelsat, being the last operator of 2005 to attempt an IPO may have taken its toll in market saturation. Also, Euronext Paris investors interested in the space sector have SES Global as an investment vehicle. According to Euroconsult, the Paris-based satellite industry consultants, Eutelsat in 2004 had about 13 percent of the global satellite industry’s $7 billion in revenues, placing it at number two in European-based operators behind SES Global SA, which has more than 20 percent of the market. In the absence of expectation of an aftermarket run-up like Inmarsat’s, Euronext investors may have decided that the larger and already public of the two European operators was a safer stock. Considering that SES Global’s own shares have dropped on Euronext by some 10 percent since September and that Eutelsat was asking for a premium over SES Global’s share price, Eutelsat may have been too aggressive in its self-estimation.
Of the remaining two of the original six, Intelsat and Globalstar remain on deck. Intelsat is busy with its pending $3.2 billion cash acquisition of Panamsat. Nevertheless, both it and Globalstar must be gauging the different IPO trajectories of Inmarsat and Eutelsat and assessing where and when to tell their stories to the public markets. Among the other players, SES Global’s reported preliminary bid for New Skies at approximately $1.1 billion was rejected in mid-November by New Skies. New Skies, thought by many of the same analysts to be the bridesmaid of the Intelsat-Panamsat acquisition, has been the subject of several proposals, and is considered the most likely target among global fixed service operators if Intelsat-Panamsat turns out to be the harbinger of a consolidation wave. It serves to remind that IPOs are not the only private equity exit, and sometimes, not even the best one.
Owen D. 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@example.com