The $30 million purchase of Maritime Telecommunications Networks (MTN), a Miramir, Fla.-based provider of offshore satellite communication services, offers “very good value” and strong growth potential, said David Moross, chairman and chief executive officer of New York’s Falconhead Capital, the private investment firm that bought the company.

MTN, a subsidiary of Fairfax, Va.-based teleport operator Verestar, became available when owner American Tower [NYSE: AMT] chose to sell Verestar last month. David Kagan, MTN’s president and CEO, said he had become familiar with officials at Falconhead earlier in his career and contacted them to solicit their interest in buying his business unit.

Now a stand-alone company, MTN is taking aim at growing its business as a satellite-based provider of communications and networking on cruise ships, oil and gas rigs and, in the future perhaps, U.S. and allied navy vessels.

“The company has been a hidden jewel of whoever owned it,” Kagan said. “The strategy has been focused on providing excellent, turnkey service, including all aspects beginning with design and engineering of where the satellite antenna is placed on a vessel to ultimately how the telephone call or data signal will be terminated. The company really has stayed focused throughout its history in serving the maritime markets.”

MTN averages an annual growth rate of roughly 17 percent. It plans to expand its business with the introduction of new services. The purchase fit Falconhead’s strategy of buying leisure, lifestyle, media and sports businesses that will appreciate in value and can be sold at a profit in three to seven years, Moross said.

Falconhead typically considers investing in 20 businesses at any one time. It was undeterred by MTN’s role as a provider of services in the generally weak telecommunications sector, despite the abundance of alternative investments, said Moross, who will become chairman of MTN’s board of directors. Kagan also will serve on the board.

“I’m a contrarian investor at times,” Moross said. “I’ve made a lot of money doing what I am doing here. I think great wealth is made when people are going against the grain.”

Due diligence conducted by Falconhead prior to the transaction found that MTN’s emphasis on offering quality service and its stable management team was appreciated by its customers, Moross said.

“If something goes wrong, MTN sends a helicopter with a technician out to sea to fix a problem right away,” Moross said. That level of service should help when the time arrives for MTN’s existing customers to renew their contracts, he added.

In his view, MTN is primarily a leisure industry service company that also serves industrial customers, such as oil and gas platforms. MTN has grown from providing equipment and service for 35 vessels six years ago to 108 vessels today. It also serves 14 oil and gas platforms.

Competition to providing offshore voice services for oil and gas platforms is fierce but MTN’s ability to offer voice, data and broadband gives it an edge in marketing to new customers, Moross said

“I looked at this as a fundamentally well managed business,” Moross said. “I always look at management teams.”

An existing business relationship with Kagan, combined with MTN’s growth trajectory, helped to seal the deal, Moross said.

Kagan added, This was a management-led buyout initiated by me. There will not be any change to our management or our management structure.”

Kagan has been at MTN’s helm for the last six years. Richard Hadsall, MTN’s founder, remains with the company as its chief technology officer.

MTN’s consistent revenue, profit and EBITDA (earnings before interest, taxes, depreciation and amortization) growth is expected to continue as long as the cruise industry stays in business, Moross said. With MTN’s role as the largest provider of satellite communications services in the cruise industry and with 20 to 25 new cruise ships coming on line in the next three years, the prospects for “organic growth” are strong, he added

Another factor working in favor of MTN is that it is constantly developing and rolling out new communications services, Moross said. For example, MTN recently began providing WiFi services to laptop users onboard specially equipped cruise ships (SN, Jan. 27). MTN also offers major newspapers via satellite that passengers can have delivered to their doors. All these services generate additional revenues for MTN and the cruise ships.

“Every year, they come up with a new product,” Moross said. “They are working on four or five new products all the time.”

Falconhead’s role of investing in media ventures also gives it resources to develop television channels for the cruise ships that MTN serves. A void currently exists in the number and kinds of TV channels that people can access offshore, Moross explained.

“It is really a distribution channel,” Moross said about MTN. “If we can fill the pipe, we can provide new technical, data and leisure services.” In addition, MTN should be “more valuable” as an independent company that provides a “great cash flow,” he said, adding, “We hope to build this into a pretty big company over a period of time.”

Natural Gas Partners, an Irving, Texas-based provider of private equity capital for the oil and gas sector, agreed last week to become a minority shareholder of MTN.

Kenneth A. Hersh, managing partner at Natural Gas Partners, described MTN as “an outstanding company” with significant growth potential. Natural Gas Partners wants to work with MTN’s management to build the company’s business that serves oil and gas industry customers, Hersh said.

Natural Gas Partners previously had considered and rejected telecommunications investments in the oil and gas sector. Aside from MTN’s growth potential and strong management, Hersh said his investment firm was swayed by a “great business proposition.”

As an investor in oil and gas exploration, Natural Gas Partners offers expertise, “positive synergy” and industry connections that could help MTN gain customers in that market. As a new MTN board member, Hersh will be able to share his understanding of the “ebb and flow” of capital into the oil and gas sector that sometimes runs counter to U.S. economic cycles. For example, the current weakness in the U.S. economy has not prevented oil and gas producers from enjoying strong cash flows that spurred increased drilling, he explained.

Kagan and his leadership team also provide “superior management. That is our hallmark when we invest,” Hersh said. He is not alone.

CEO Is Key To Success

Leslie Gaines-Ross, author of a new book entitled CEO Capital: A Guide to Building CEO Reputation and Company Success, said that one of the key intangibles for any company is the CEO’s reputation. Research has shown that nearly 50 percent of a company’s success is attributed to the CEO’s reputation, she explained.

Customer focus and strong relationships are critical for companies that generate revenues under $100 million, Gaines-Ross said. The relationships between a CEO and his or her customers are “immensely critical,” she added.

“The CEO sets the tone for what an organization is about. The CEO’s reputation is a wealth-creating asset that is a form of capital for a purchaser to buy. It factors into the way a company is perceived. Today, I think there is a concern about credibility and doing due diligence to make sure that the CEO’s reputation is rock-solid,” she observed.

Johannes Kausland, superintendent of marine communications at Norwegian Cruise Lines, has been a cruise industry innovator in rolling out new communications services for passengers and crew. Kausland said MTN officials have been good partners in introducing new services, such as WiFi wireless capabilities.

MTN’s Hadsall explained, “We listen to what cruise lines want and we try to provide it. Our goal is to make that ship no different than a hotel. We want to provide anything and everything that is requested.”

The payoff for MTN is that last year proved to be the best in company history with rising revenues and EBITDA, Kagan said. The year would have been even better if it were not for a bankruptcy at one of its cruise industry customers, Renaissance Cruise Lines, Kagan said.

“All of our customers have multi-year contracts,” Kagan said. “Nearly all the onboard hardware is MTN-owned. These are expensive assets to deploy and we get good returns on these assets. We expect to grow the number of installations by at least 20 percent a year. We have 94 of 130 vessels in the cruise industry that can accommodate C-band and Ku-band terminals onboard.”

Despite a difficult market for debt financing, Falconhead was able to arrange a package on reasonable terms due to MTN’s growth and EBITDA trends. MTN’s financial performance allowed Falconhead to negotiate “good covenant” agreements with the lenders that will allow the company to grow, Moross said.

American Tower will use proceeds from the MTN sale to repay loans, as required under the company’s secured credit facilities. As a result of these activities, American Tower designated Verestar as a discontinued operation for the fourth quarter and full year 2002.

The plan is for American Tower to divest itself of the rest of Verestar later this year. That would eliminate approximately $120 million of capital lease obligations for the parent company. Until the rest of Verestar is sold, American Tower is guaranteeing up to $12 million of its unit’s contractual obligations.

MTN’s purchase by Falconhead lifts the company out from under American Tower’s financial problems.

“Our focus is on the maritime markets without any other distractions on the part of management or the board,” he said. “Falconhead will support us in our financial endeavors and strategic direction.”

MTN’s ties with Verestar have not been completely severed, however, due to a long-term contract for Verestar to provide teleport services, he added.

–Paul Dykewicz

(David Moross, Falconhead Capital, 212/634-3304; Dave Kagan, Richard Hadsall, MTN, 954/538-4000; Kenneth Hersh, Natural Gas Partners, 972/432-1440; Johannes Kausland, Norwegian Cruise Lines, 305/436-4448; Leslie Gaines-Ross, 917/853-1847)