Wall Street Analysis

By Tom Watts, SG Cowen Securities

There were reports last week that PanAmSat Corp. [SPOT] is seeking buyers to purchase parent Hughes Electronics Corp.’s [GMH] 81 percent interest in the company. This highlights a trend among fixed satellite service (FSS) operators. Just when it looks like they should be accelerating their free cash flow and getting a pay-off for their years of investment, their owners are looking to sell them.

If the public markets were stronger, solving the current ownership mismatch would be easier. The FSS operators could offer their shares to the public. At current valuations, these companies look like bargains.

However, with current weak stock market conditions, investors have little appetite for new offerings. The fact that an upturn in FSS demand is unlikely before early 2004 adds to the challenge.

The situation has created opportunities for buyers. Eutelsat’s major holders Telecom Italia, France Telecom and Deutsche Telekom all found buyers for their stakes among major investment firms. As we reported in a previous column, investment firms have bought small stakes in Intelsat, even while the company continues to move to a public offering. New Skies Satellites [NSK] still has more than 70 percent of its shares held by telephone companies and could be the next interesting target for investment firms.

What’s a public investor to do? For those with patience and interest in following in the footsteps of the smart investment firms, FSS companies represent an interesting opportunity. Valuations are quite low. The companies are investment grade borrowers with accelerating free cash flow. SES Global [SES.LU] even pays investors a dividend and trades at a modest 8 times earnings. The payoff could be as soon as 2004, when we expect a market rebound and rising stock prices.

Tom Watts is a managing director and satellite analyst at SG Cowen Securities. He can be reached by phone at 212/278-4260 or by e-mail at [email protected]. Readers should assume that SG Cowen Securities Corp. and/or its affiliates intend to offer services in investment banking to the above referenced companies within the next three months, and to seek compensation for such services.