By Thomas Watts

The satellite industry has been waiting for Intelsat’s initial public offering (IPO) for almost three years now, since the passage of the Open-Market Reorganisation for the Betterment Of International Telecommunications (ORBIT) Act in March 2000 required Intelsat to go public. So far, Intelsat has taken every possible step to satisfy ORBIT. The company’s recent public debt registration marks one more step in the right direction. In the end, though, weak public equity markets may point Intelsat in other directions to meet ORBIT’s intent.

Intelsat’s registration of its 7 5/8 per cent senior notes due 2012 made it a publicly reporting entity filing with the U.S. Securities and Exchange Commission. The public release of its results marked its first step into the quarterly reporting cycle that its competitors PanAmSat, New Skies and Loral all follow. (As a European registrant, SES Global reports only semi-annually.) This represents a boon for analysts seeking information on the industry. It also represents an important step to educating investors about Intelsat and the fixed-satellite service (FSS) industry.

Intelsat plans to take another important step on March 14, when it holds its first investor conference call to review its 2002 results. With this step, Intelsat will be carrying out virtually all activities of publicly traded companies, except actually having its stock trading. However, these steps still will not meet all the requirements of the ORBIT Act.

The ORBIT Act set out a number of key criteria when originally formulated, most of which Intelsat has satisfied:

Privatisation to occur by April 1, 2001- This date was extended and on July 18, 2001, Intelsat privatised by transferring its assets and liabilities to Intelsat Ltd. incorporated in Bermuda.

Termination of Privileges and Immunities – By virtue of its privatisation, Intelsat gave up its privileges and immunities. As part of this, Intelsat is now subject to taxation, as well as all the other legal and regulatory obligations of a private company.

Prevention of Expansion During Transition – The ORBIT Act prohibited Intelsat from expanding into additional services until it privatised. The privatisation resulted in the elimination of various restrictions such as entering new markets, acquiring and operating ground facilities and providing new services. Currently, the company actively seeks to expand its business in these areas.

Regulatory Treatment – The new company must apply through the appropriate national licensing authorities for international frequency assignments and associated orbital registrations for all satellites. This requirement has been fully met. Intelsat goes through the co-ordination process like any other commercial entity under the auspices of the UK Office of Telecommunications by virtue of its legal domicile in Bermuda.

Competition Policies – The ORBIT Act requires new Intelsat be domiciled in a country that 1) regulates competition in telecommunication services, 2) is a signatory to the World Trade Organisation’s Basic Telecommunications Services Agreement, and 3) has commitments that include non-discriminatory market access to their satellite markets. Again, Intelsat has satisfied all these requirements by being legally based in Bermuda, where the company is subject to the laws of the UK and benefits from the UK’s international relationships.

Despite Intelsat’s progress in satisfying the ORBIT Act, Intelsat still has two key requirements it has yet to meet:

Independence – Intelsat is required to substantially dilute its aggregate ownership. The company is seeking to find potential buyers to meet this requirement.

IPO – As we mentioned, the company was required to go public by October 2001. This date was extended to December 31, 2002, then to June 30, 2004.

The current conditions of the capital markets make these conditions difficult to meet. Even if Intelsat could do an IPO, it may not be able to do it in enough size to meet the dilution intentions of the ORBIT Act. Many parties believe that 20 to 25 per cent dilution could be expected, which would require a sizeable IPO. The question is, “Can Intelsat meet the intent of these requirements in ways other than an IPO?”

We believe Intelsat can achieve the objectives of the ORBIT Act without proceeding with an IPO in the near term. We believe the Act’s number one intention was dilution and that the IPO requirement was only intended as a means to achieve that. If Intelsat could dilute its existing shareholder base of former signatories through other means, we expect Congress would amend the act to erase or postpone the IPO requirement further.

How could Intelsat achieve dilution? The easiest way would be to find financial buyers for some of the stakes currently held by former Intelsat signatories. We believe a number of financial buyers would have interest in these stakes and could purchase them at favourable levels. Our current report on Intelsat lays out this shareholder base in detail. We expect to see transactions over the coming months.

Of course, financial buyers would require a path to liquidity. That requirement points to Intelsat achieving a public market for its shares ultimately. However, the company could achieve liquidity through a number of paths, including an IPO, a merger with a public company, or a sale. Lifting the ORBIT Act’s requirement of an IPO by June 30, 2004, could allow Intelsat to wait until growth in the FSS market rebounds from its current slowdown and the IPO market recovers fully.

Thomas W. Watts is managing director at SG Cowen Securities Corp. He can be contacted at e-mail: [email protected]