PanAmSat CEO Joe Wright outlined the company’s growth strategy when recently presenting fourth quarter results, but other issues about the direction the company overshadowed the results. It has been reported that PanAmSat’s parent, Hughes Electronics, is considering merging Hughes Network Systems (HNS) into PanAmSat as a way of using PanAmSat’s strong cash position to fund HNS’ ambitious SpaceWay satellite broadband venture.

William Kidd, a satellite equity analyst at Lehman Brothers, is not enthusiastic about such a combination. “We think such a merger could easily turn out poorly for PanAmSat. HNS/SpaceWay would cause PanAmSat’s positive cash flow and earnings story to vanish almost immediately. SpaceWay still requires $400 million in capex before it is operational in 2Q04. HNS’ low EBITDA margin business would reduce PanAmSat’s strong EBITDA margins of over 70 per cent. Moreover, once SpaceWay goes live, it needs to fund operating losses as well as depreciate $1.8 billion in assets, which would destroy PanAmSat’s bottom line,” Kidd said in a research note.

Hughes could be considering such a move as a prelude to an acquisition by News Corp. Tom Watts, a satellite equity analyst at SG Cowen, said that a merger of PanAmSat and HNS “would achieve two strategic objectives: 1) better prepare Hughes for a sale to News Corp or another buyer interested primarily in Hughes’ DirecTV unit, and 2) provide a growth path for PanAmSat, which is currently stuck in the low growth FSS market of leasing satellite capacity.”

Watts continued: “The combination would also make it easier for Hughes to sell itself to News Corp, packaging all the businesses together that News Corp had little interest in, namely HNS, SpaceWay and PanAmSat. Outside of DirecTV, Hughes primary remaining business would be DirecTV Latin America, which is a candidate for merger with News’ Sky Latin America venture.”

It has also been reported that PanAmSat has broken off negotiations to acquire European satellite operator Eutelsat. Commenting on that, Watts said: “As we have indicated in our recent reports, we expected Eutelsat to remain independent, despite its shareholders desire to sell. The stonewalling of takeover bids resulted from a combination of the current management team’s desire to stay in place, and broader European policy concerns about foreign entities gaining control of a European operator and potentially shifting orders for satellites and launch services away from European vendors.”

PanAmSat reported revenues of $196 million in the fourth quarter, compared to $203.7 million at the same stage in 2001. For all of 2002, PanAmSat had revenues of $812.3 million, compared to $870.1 million for 2001. The company still has $880 million in cash and short-term investments available and access to another $250 million in credit.

The results were in line with analysts’ expectations. Robert Peck, a satellite equity analyst at Bear Stearns, said in a research note: “The company continues to execute on its top line growth despite the difficult telecoms markets both domestically and internationally. In addition, PanAmSat continues to improve its cost structure reporting total operating expenses of $52 million for the quarter, outperforming our $55 million estimate.”

While PanAmSat expects 2003 revenues to remain pretty flat, Wright outlined three areas for its growth strategy going forward. PanAmSat would look at consolidation opportunities. Secondly, the operator would look to expand its service range, in areas such as government services, digital services and hybrid networks.

PanAmSat does not expect to see much revenue growth in 2003. It expects overall revenues for the year to be flat and could actually be less than $800 million.

Armand Musey, a satellite equity analyst at Salomon Smith Barney, said in a research note: “While guidance for 2003 is modestly lower than our prior estimates we believe management is being conservative as our analysis indicates a stabilising environment and we believe PanAmSat is well positioned to take market share.”

Mark Holmes