Intelsat is set for a busy year. The satellite operator still hopes to have an initial public offering (IPO) this year. It also put in a bid to buy European fixed-satellite service (FSS) operator Eutelsat as it bids to increase its presence in Europe. While that deal doesn’t look likely in the short to medium term, the operator could still use its strong balance sheet to play an active role in industry consolidation. In an interview with Interspace, Intelsat CEO Conny Kullman talks about the prospects for an IPO, the operator’s recent investment in WildBlue, as well as his thoughts on possibly combining with Eutelsat at a later date.

Interspace: Could you give us an update in terms of when you are likely to have an IPO? How confident are you that you will be able to have it before 2004?

Kullman: The markets are still fairly shaky, as you know. I don’t think we have had any IPOs in January so the markets are clearly not co-operating right now. In terms of preparing the company for the IPO, we have done quite a lot of things since privatisation. We have made sure that our financials are GAAP compliant and have completed the registration process with the SEC [Securities and Exchange Commission]. We have taken a hard look at our capital expenditure programmes and by the end of this year, we will have a fleet that will have an average age of 4.5 years, which means that we have new hardware in the sky, with over 11 years in remaining service life. On the capital expenditure side, we are in quite good shape to grow our free cash flow. These days, this is something that the financial markets look at very carefully. There has been a drift away from looking only at EBITDA [earnings before interest, taxes, depreciation and amortisation] and EBITDA multiples to also looking at the cashflows in these types of operations. We are in very good shape on that side. We have also had a couple of eliminations of staff and retooled the company. Some of those skills were no longer needed and we are focusing on what we need for the future. We have reshaped the company to be more responsive to the customers. On both cap-ex and the op-ex side, I think we have quite a good story to tell to the market.

Interspace: If the market conditions fail to get better, would you look to go to Congress to gain an extension under the Orbit Act? If you needed to gain a further extension, how soon would you have to start preparing for that, particularly in light of the primaries and U.S. presidential election next year?

Kullman: Our aim is to really get the IPO done so we don’t have to go through that process. You talk about the legislation but there is also a very real reason to go public and put the shares out in the market for the company in terms of business reasons. That is really what is driving the management team to get this done as soon as we can. To have a public equity [offering] is definitely the right thing for this company. It is right in terms of having a good position in dealing with acquisition opportunities and doing business with other companies. But, it is also very important for our shareholding base to create liquidity so that they can trade their shares should they decide to do so. There is a strong business case, both from running the business and also from the shareholders perspective, to getting this done as soon as possible.

Interspace: Could you tell us about the significance of the investment in WildBlue? Do you see there being opportunities for Intelsat to export that broadband technology to other parts of the world?

Kullman: We saw this as a great opportunity to do broadband here in North America. We looked very carefully at the business plans, technical solutions, the quality of that operation, and working together with Liberty and NRTC, I think we have two very strong partners. Liberty is known as a smart investor with John Malone and his crew. NRTC has a strong knowledge of the rural counties of the U.S. and relationships with distribution channels. This was an integral part of our thinking and why we thought this was a good opportunity.

In terms of deploying it to other parts of the world, I would certainly say ‘Yes’. We would learn from this opportunity and, if we see good opportunities, we would consider deploying that business model elsewhere. A couple of things need to happen on the way to that. We are buying into the existing WildBlue assets at quite favourable prices. We will get 30 per cent ownership of the restructured company for $58 million. Before we came in there was $300 million invested in this system. We have paid a very good price for these existing assets. What needs to happen if we are going to deploy this model to other parts of the world, is that there needs to be a substantial price reductions for customer premise equipment.

Interspace: You have stated that you have wanted to own and operate your own Ka-band system. What is your strategy in this area now?

Kullman: We looked long and hard at deploying our own satellite system in the late 1990s and 2000. We felt that in looking at the business cases for those possibilities, we were never really comfortable with the customer ramp-up that you needed. We didn’t think a few years ago that those numbers were in the right place and, of course, we saw other players that started to develop systems such as Skybridge, Astrolink, SpaceWay. They have scaled back on their initiatives. We tend to believe that the market is moving in the right direction. We are still looking at putting Ka-band up. But, the first phase of that is probably to have a partial payload on the future satellite rather than to have a full dedicated satellite. We would combine with traditional business with Ka-band business on one of our next satellites. No formal decisions have been taken internally. We are currently going through an extensive review of our network infrastructure and decided on what we are going to do in terms of replacing our Intelsat VII and our Intelsat VIII series satellites. That work is not fully finished but we should have more clarity towards the second half of this year.

Interspace: Could you clarify your position in terms of a possible acquisition of Eutelsat? Bearing in mind the fractured nature of Eutelsat’s shareholder base, is such an acquisition unrealistic at this time?

Kullman: Consolidation will happen in this business over time. This is an industry where size leads to efficiencies, both in terms of operating and capital expenditures. As a large operator, we can deploy and use orbital positions more effectively. We obviously looked at the different players in the market place, and found in Eutelsat, a very interesting company to put our operation together with. There is a good complementary nature in terms of regional coverage as well as in terms of business lines. While they are strong on the video side, we are strong on the data side, and believe that putting the two businesses together would lead to a very strong combination.

We will certainly continue to have interactions with the new shareholders to understand what direction they want to take the company. We have a number of other opportunities we are looking at to use the strength of the balance sheet to build our business. Gaining control of [Eutelsat] is something that I don’t rule out for the future.

The bottom line is, we had a very strong proposal on the table. As an effect of [Eutelsat] shareholders not working together, they will walk away from the table with less value than what they would have otherwise. You have seen a lot of debate in the European press, particularly the French press, about the risk of an acquisition by us or by PanAmSat or any other non-European interest and how it would have a very negative impact on the industry. I think when people sit down and look at how the different players have done their procurements, Intelsat has been a very strong supporter of the European industry. Roughly, 50 per cent of the new satellites we now have in orbit, the business has gone to Europe in terms of satellites and launch vehicle services. Obviously, Eutelsat has been a strong supporter of the European industry also. So, combining the two of us would have created a company with a strong European focus. I think that element is still there, that the combination of the two of us would have been the best solution for the industry. There is always a tendency when a private equity type of ownership comes into place that they will generally have a short-term focus. There is some risk that Eutelsat might find itself in a fairly defensive position in terms of making investments, because that is in the interest of the new owners. This could have a negative impact on European industry, and the industry as a whole.

Interspace: You have cancelled the 10-01 satellite being built by Astrium. Do you think this cancellation will affect your relationship with any of the players in the satellite manufacturing industry?

Kullman: We cancelled that satellite because the satellite was very late coming out of the factory. In the mean time, we were redeploying our hardware to fit the needs of our customers. In terms of the relationships with the satellite manufacturers, we have had long talks with Antoine Bouvier and his top people at Astrium. I don’t think the fact we have cancelled [that order] impacts our relationship with the industry. If you look at what happened over the last year, you have had SES cancel, I think, four contracts with Alcatel. You have had PanAmSat cancel with Boeing and us cancelling with Astrium. Some of those things have happened from all of the three large global operators. It had an impact on three different manufacturers. It is just a reality of life that these things happen and I don’t think it is going to have any particular impact on Intelsat’s relationship with the industry. In general, the industry might learn from this. When we make a procurement, one of the parameters we look at is the schedule that the different proposals come in with. Time-to-market is more important today than it ever was. That will continue to grow in importance in the future. I think the industry needs to live up to whatever contracts they are signing and this might lead to the industry to being more focused on what they propose and how they implement, not only because of Intelsat’s cancellation of 10-01, but also because of what is happening with other operators.

–Mark Holmes

(Contact: Susan Gordon, Intelsat, e:mail: [email protected])