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Intelsat Fills Void With Loral Deal

By | July 21, 2003

      Intelsat Ltd., of Hamilton, Bermuda, is addressing one of its most glaring weaknesses by signing a definitive asset purchase agreement to acquire six Loral Skynet satellites and orbital slots over North America for roughly $1 billion.

      The four in-orbit and two under-construction satellites will give much-needed U.S. coverage to Intelsat and increase its presence in the cable television and broadcasting market. Intelsat, already operating in more than 200 countries and territories, is looking to complement its global network that currently includes capacity on 26 satellites.

      Intelsat has been hampered by a lack of North American coverage. The U.S. government did not allow the former intergovernmental satellite organization to provide direct satellite services to the United States market prior to Intelsat’s July 2001 privatization.

      The acquisition of North American satellite assets also was enticing to Intelsat due to the company’s interest in increasing its customer base in the cable television and broadcasting segments. The deal with Loral Skynet would accomplish that objective.

      Tony Trujillo, senior vice president and chief administrative officer at Intelsat, said, “We clearly felt this was a once in a lifetime opportunity to secure extraordinarily valuable assets that provide us with full CONUS (continental United States) coverage and a strong position into the lucrative U.S. video market.”

      With SES Americom and PanAmSat [Nasdaq: SPOT] splitting roughly equal parts of an 80 percent share of the U.S. video market and showing no signs of selling their satellites, Intelsat opted to strike a deal with Loral Space and Communications [NYSE: LOR]. Loral Space’s satellite services unit, Loral Skynet, serves the remaining 20 percent of the U.S. video market.

      However, Loral Skynet’s satellite assets have not established the same high-value cable neighborhoods that SES and PanAmSat have assembled.

      Joseph Wright, president and CEO of PanAmSat, said Intelsat would have a “tough time” growing beyond the 20 percent market share that Loral Skynet thus far has attained. One reason is that SES and PanAmSat have clusters of video customers under long-term contracts that are “impossible to duplicate,” he added.

      “Intelsat replaces what was a weak competitor that was putting a lot of price pressures on the marketplace worldwide,” Wright said. “It [the deal] should stabilize U.S. pricing.”

      Loral’s financial troubles forced the company to cut prices to lure customers at a time when it needed to ensure as large of a revenue stream as possible. Ultimately, Intelsat enticed Loral to sell its North American satellite assets with an attention-grabbing $1 billion, all-cash transaction.

      The agreement specifically provides for Intelsat’s purchase of Telstars 4, 5, 6 and 7, which are currently in orbit, as well as Telstars 13 and 8, both scheduled to be launched later this year and in the first half of next year, respectively. In accordance with bankruptcy court procedures, the proposed transaction will be subject to higher and better offers but Loral Chairman and CEO Bernard Schwartz expressed confidence that the deal would be approved.

      The $1 billion payment for the assets may increase or decrease, based on business performance prior to the deal closing. Intelsat also agreed to order a new satellite from Loral and will make a $100 million down payment on that contract when its acquisition of Loral’s North American satellites is finalized.

      “Although Loral made the arrangements for a post-bankruptcy sale, it is not necessarily a fait accompli,” said Roger Rusch, president of the TelAstra satellite consulting firm in Palos Verdes, Calif. “Normally such sales are not automatically approved by the bankruptcy courts. The first step is bankruptcy, followed by a court appointed executor. It might not be the current Loral management. Second, the court would expect that the debt holders should be treated fairly and that the sale price for the satellites should be the best deal that debt holders could receive.”

      A possibility exists that another satellite operator, such as Eutelsat or New Skies Satellites N.V. [NYSE: NSK], might be interested in buying certain Loral satellites that operate over North America and pay more than Intelsat for some of them. If the other satellite operators tell the judge that Intelsat’s offer is a “rotten deal,” the proposed transaction might be modified or unravel, Rusch said.

      “Perhaps the satellites would be sold individually rather than in a set,” Rusch said. “Furthermore, there are some debt encumbrances that must be considered.”

      Intelsat’s Trujillo viewed the deal for Loral’s North American asset as a “perfect fit” for his company, compared to other operators in the industry.

      “We don’t believe there is anyone else who can integrate these assets into their system as easily as we could,” Trujillo said.

      D.K. Sachdev, president of SpaceTel Consultancy in Vienna, Va., said, “The proposed acquisition of six Loral satellites and the rights to the associated orbital locations fills a long-standing gap in Intelsat’s global network. Given the paucity of any new orbital locations over North America, acquisition of currently operating assets was the only viable alternative for Intelsat, after the earlier restrictions were lifted. Once SES acquired GE-Americom [in November 2001], it was even more imperative for Intelsat to move quickly to acquire these assets in order to maintain its competitive position on a global basis.”

      Dean Olmstead, president and CEO of SES Americom, said the consolidation between the operations of Intelsat and some Loral Skynet satellites does not change either the competitive position of Americom or of the entire SES Global enterprise. The combined satellite assets would result in healthier competition in the United States, the world’s largest media market, he added.

      Tom Watts, a Wall Street satellite analyst with SG Cowen, said, “The Loral satellites give Intelsat an important beachhead in the higher margin U.S. video market.”

      The acquisition of Loral Skynet assets should help Intelsat position itself more favorably with investors when it eventually pursues an initial public offering (IPO), Watts said. The deal also marks one more step toward consolidation and removes the most desirable available fleet from the list of potential acquisition targets, he added.

      Overpriced Assets?

      Industry observers differed about whether Intelsat’s offer for the Loral satellites is a bargain or an above-market price. The transaction was valued by several observers in the ballpark of seven-and-a-half times EBITDA (earnings before interest, taxes, depreciation and amortization).

      The bottom-line is that Schwartz would not have agreed to the sale unless he felt the price was the best he could obtain under the current market conditions. When SES was looking for North American satellite assets a few years ago, it held talks with Loral but ultimately found GE Americom to be a more willing seller.

      In Sachdev’s view, the $1 billion price tag for six satellites with an average remaining maneuver lifetime of 13.7 years and rights to the North American orbital locations is “quite a bargain.” The price could be explained by Loral’s weak financial condition that required it to file for Chapter-11 bankruptcy court protection the same day that the deal with Intelsat was announced, he added.

      The valuation analysis is supportive of current multiples in the marketplace — but way below the 11 times EBITDA (earnings before interest, taxes, depreciation and amortization) that SES paid for GE Americom less than two years ago, said Dianne VanBeber, Intelsat’s vice president of investor relations.

      Schwartz described the price Intelsat agreed to pay for the assets as “rich” compared to current market valuations for fixed satellite services (FSS) operators but he added that Wall Street currently was “undervaluing such assets.”

      Indeed, the price Intelsat agreed to pay exceeded Wall Street’s current market valuation of FSS assets of roughly five or six times EBITDA, Schwartz said. The real market – the price Intelsat agreed to pay for Loral’s North American assets – shows the value is higher, he added.

      “The speculated value of Wall Street is exceedingly lower than that valuation,” Schwartz said. However, Intelsat officials knew what they wanted and both sides were able to agree on a valuation “very quickly,” he added.

      The satellite market has eroded considerably since SES Americom was combined with SES ASTRA to form a new global satellite company, SES Global S.A. [Luxembourg: SES] during November 2001.

      Steve Symonds, a satellite consultant who heads Symonds & Associates in Wilton, Conn., said the planned acquisition on balance is a “high-stakes gamble” for Intelsat. His view is that Intelsat is taking a big risk by paying a “substantial premium” beyond Wall Street’s market value for FSS assets and by assuming $1 billion in debt to pay cash to Loral, he added.

      PanAmSat’s Wright agreed that Intelsat agreed to pay a “pretty high price” for the assets but added the price validates that investors currently are undervaluing his own company’s stock price.

      “That is a good, healthy price for a fleet that reflects very well on the rest of us, Wright said. “It is a very smart move by Intelsat to take advantage of an opportunity that was there.”

      –Paul Dykewicz

      (Tony Trujillo, Dianne VanBeber, Intelsat, 202/944-7406; Bernard Schwartz, Loral Space, 212/987-1105; Joseph Wright, PanAmSat, 203/210-8606; Steve Symonds, Symonds Associates, 203/834-2766; Roger Rusch, TelAstra, 310/373-2195;Monica Morgan, SES Americom, 609/987-4143; Tom Watts, 212/278-4260)

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