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Intelsat Gains Ground In Buying Loral Assets

By | October 27, 2003

      The process has been slow but Hamilton, Bermuda-based Intelsat Ltd. moved another step closer to buying Loral’s North American assets last week.

      The satellite services operator also showed why it wants to grow through acquisition when it reported weakened financial results last week for third quarter 2003. In addition, Intelsat filed supporting material with the Federal Communications Commission (FCC) in defense of its request to delay its planned initial public offering (IPO), amid pointed objections from EchoStar Communications [Nasdaq: DISH].

      EchoStar last week withdrew its $1.029 billion offer to buy Loral’s North American satellite assets after the company lost in its attempt to outbid DirecTV for the DirecTV 7S satellite now nearing completion in a Loral factory.

      Intelsat remains committed to pursuing its acquisition of Loral’s North American assets but the process is a least a couple of weeks from completion. Even if the bankruptcy- court judge presiding over the Loral Space and Communications Chapter 11-restructuring process allows the seller to accept Intelsat’s $1.1 billion offer for the assets, the decision can be appealed during the next ten calendar days by any of the affected parties.

      “We view this as a very controlled process,” said Dianne VanBeber, Intelsat’s vice president of investor relations. “We will stay the course and follow it through the end.”

      Intelsat is one of the fixed satellite service operators that are trying to grow through expansion. PanAmSat [Nasdaq: SPOT] has bought two companies in recent months that cater to government satellite services. Intelsat’s expansion is an attempt to gain a foothold in the important North American satellite service market dominated by PanAmSat and SES Americom.

      However, all of the operators seem to be facing reduced demand and scaled back revenues.

      “Our results reflect the same market conditions that have hurt our competitors’ results,” VanBeber said.

      Specifically, Intelsat released weak third quarter financial results that showed year-to-date revenues fell 4.2 percent through Sept. 30, and third quarter 2003 revenues dipped 3.8 percent compared to the same period last year. Intelsat’s net income also dropped for both periods of 2003 due to weak revenues and higher depreciation this year than last year.

      Intelsat reported revenue of $237.2 million and net income of $48.4 million for third quarter 2003. The company’s adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) ended at $172.5 million for the same period. The results were within the company’s guidance.

      The most encouraging financial measure probably is Intelsat’s rising free cash flow caused by reduced capital expenditures. The company’s free cash flow reached an “outstanding” $284 million through the first nine months of 2003, compared to $40 million for all of last year, VanBeber said. The main reason for the reduced capital expenditures is that Intelsat has completed its “fleet renewal program.”

      With excessive capacity in many regions of the world, satellite operators generally are holding back on plans to build and launch new satellites.

      “Although market conditions and the competitive environment pose challenges in terms of our revenue, we remain focused on delivering strong operating margins and free cash flow from operations,” said Intelsat executive vice president and chief financial officer Joe Corbett. “We continue to project that our revenue decline in 2003 will be of smaller proportions than that experienced in the prior year.”

      Andrea Maleter, technical director at the Bethesda, Md.-based Futron market research firm, said, “This is a key transitional time for Intelsat as it is moving into the implementation of a new market and business strategies. Acquisition of the Loral assets will give Intelsat a major role in the North American service market, particularly in video – a business it has not served before. At the same time, Intelsat is continuing to enter into more ventures that take its business closer to the user and away from its traditional wholesale role.”

      Intelsat still is planning to go public but has requested an extension to complete its initial public stock offering (IPO) from the FCC until June 30. EchoStar Communications [Nasdaq: DISH] is the only company to file an objection to pushing back the Intelsat IPO deadline six months. Intelsat rebutted EchoStar’s comments in a filing of its own last Tuesday.

      The IPO is required under the Open-Market Reorganization for the Betterment of International Telecommunications Act (ORBIT Act). Poor market conditions have prevented Intelsat from completing its IPO thus far.

      –Paul Dykewicz

      (Dianne VanBeber, Intelsat, 202/944-7406; Andrea Maleter, Futron, 301/347-3450; William Coulter, Coudert Brothers, 202/736-1811)

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