Hedge Funds and the Satellite Industry (Part II)
Last month, we reviewed the preliminary "Master Contribution and Support" agreement by hedge fund Harbinger Capital Partners, which has invested broadly in the mobile satellite service (MSS) sector to acquire leading MSS operator Inmarsat. Harbinger already has a 28.8 percent stake in Inmarsat through portfolio company SkyTerra, the parent of MSS operator Mobile Satellite Ventures (MSV), and Harbinger also has provided financing to SkyTerra and MSV. We also started an examination of the likely dynamics of hedge fund entry into MSS, which superficially resembles the private equity buyout firms’ entry into fixed satellite service (FSS) in the 2003-2004 period.
The comparison between the private equity investments in FSS and current hedge fund activity in MSS and other industry sectors is limited. Buyout firms were attracted to FSS by its reliable cash flows, critical to paying off and restructuring the debt of highly leveraged acquisitions. The global and main regional FSS fleet operators have similar business models and offer similar services to a customer base that cannot do without those services. The MSS sector has very different dynamics, with most operators invested in a high growth, new business model mode; different customer bases and broadly divided between operators whose business plan is based on the rollout and take-up of ancillary terrestrial component (ATC) service, such as MSV, and those not based on ATC service, such as Inmarsat.
Although hedge funds have been around for decades, they have until recently been a limited asset class, characterized by high investment thresholds that functionally barred entry to all but very high net worth investors, a classic long-short strategy and a passive investment style. Hedge fund numbers, strategies and shareholder activism have exploded in the first years of the 21st century and burst into mainstream consciousness as a result of special dynamics. Chief among these are the growth of hedge fund assets under management; the lack of regulatory limitations on hedge fund strategies and the Enron/WorldCom/Arthur Andersen accounting scandals and the stricter corporate governance and accounting standards that these scandals engendered. This last factor has made respectable a new generation of institutional shareholder activism and mentality of lack of deference to boards of directors that, combined with the growth of hedge funds as an asset class and lack of regulatory strictures to constrain their activities, make hedge funds a major challenger — and therefore preoccupation — of corporate boards and management that the funds perceive as underperformers.
Finally, the current hedge fund activism is a dynamic that fills a void. To an extent, it replaces the hostile takeover activity of the 1980s. The takeover wave was largely subdued by the development of board-friendly corporate charter defensive measures such as poison pills, shareholder rights plans, staggered boards and the like. It was also bolstered by court decisions and corporate law amendments, all of which made 1980s-style takeover activity far more difficult.
Also, to the extent that hedge funds until 2007 were in competition with buyout firms for investment opportunities, the current credit crisis and retrenchment of debt financing on which buyout activity is dependent for leverage to produce the returns and enable the three-to-seven-year flips of acquired companies on which their business model depends, have left the field more open to hedge fund activity at the same time that hedge fund assets have increased and their acceptance as an investment vehicle by pension funds and other traditionally conservative investors has grown. Hedge funds in the current credit crisis may be especially attracted to companies with low debt loads that would have been attractive to buyout firms to lever up as well as those without shareholder rights plans and other corporate charter provisions that limit shareholder activism.
The range of hedge fund strategies has expanded to include quant financial model-based trading activity, event-driven strategies, merger and acquisition arbitrage, distressed asset investing and restructuring, and others. It will be interesting to analyze Harbinger’s strategy going forward. Harbinger’s MSS sector investments may indicate a pan-MSS hedging strategy or the beginning of an attempt to consolidate and restructure the MSS sector. Whether it will be a harbinger of other hedge fund activity in the satellite industry remains to be seen, but given the assets they control, hedge fund investment and activism is something the industry will continue to see.