Intelsat Sees Opening For IPO

Intelsat is preparing to pursue its long-anticipated initial public stock offering (IPO) at a time when the market for such transactions appears to be recovering.

The plan is for Intelsat to sell up to $500 million worth of ordinary shares, encompassing stock that would be a combination of shares newly issued by the company or sold by existing investors. The move is a departure from Intelsat’s past practice of seeking and receiving regulatory approval to postpone the IPO until market conditions improved.

The company’s plan is to complete the transaction by a June 30 deadline under the Open-Market Reorganization for the Betterment of International Telecommunications Act, also known as the ORBIT Act. Intelsat is expected to file a registration statement with the U.S. Securities and Exchange Commission (SEC) by the end of March.

Proceeds from the IPO will be used to repay outstanding debt and for general corporate purposes.

“The IPO market is definitely opening up,” said Kevin Leclaire, senior associate at SpaceVest, a Reston, Va.-based venture capital firm that invests in advanced technology and space-related companies. “During the fourth quarter of 2003, more than 30 venture-backed IPOs were in registration.”

A big reason for the rush to go public is that the stock markets have surged during the past year. The Dow Jones Industrial Average is up 33.1 percent, rising from 7,864.23 on Feb. 5 last year, to 10,470.74 on Feb. 2 this month. Nasdaq has jumped 57 percent, fueled by a climb from 1,282.47 on Feb. 3 last year to 2,014.14 on Feb. 2 this year. The Standard & Poor’s 500 Index is up 35.7 percent, soaring from 829.69 on Feb. 3 last year to 1,126.52 earlier this month on Feb. 2.

Cashing Out

In addition, certain Intelsat shareholders are likely looking to cash out some portion of their holdings in the company. The trend already has become apparent with the sale of stakes in other former intergovernmental satellite organizations, such as London-based Inmarsat and Paris-based Eutelsat. Both satellite operators have had certain shareholders sell their stakes. In the case of Inmarsat, a large financial investor bought the entire company. Several major telecommunications companies, including Telecom Italia, sold shares of Eutelsat to financial investors.

A key question still unresolved about Intelsat’s IPO is the proportion of new stock versus existing shares that will be sold. The higher the number of new shares issued, the more cash that would be available for Intelsat, although there would be potential for significant dilution for the existing shareholders.

Once Intelsat files a registration statement with the SEC, a pricing range for the company’s shares should be listed. That pricing range would provide a rough valuation target for the organization, Leclaire said.

Armand Musey, a partner with the boutique investment-banking firm NearEarth, of New Canaan, Conn., is part of an investment group that recently bought a small stake in Intelsat from an existing shareholder. He said it makes sense for Intelsat to try its IPO now.

First, certain Intelsat shareholders are not interested in maintaining their holdings in the company for the long-term. In addition, the industry is consolidating and the ability to issue stock on the public market could be an attractive tool for making strategic acquisitions down the road, he explained.

“The industry is going to have to consolidate,” Musey said. “There is too much capacity. Return on investment is not attractive right now. To improve that, the industry is going to consolidate.”

Market Timing

Whether the timing of the IPO is ideal is not clear. Ultimately, that is not the most important factor, Musey said. “It is very hard to judge the stock market,” Musey said. “Right now, the stock market is very solid. It is a big risk to try waiting another year. It is a good idea to go for it. You can always hope the market will be better.”

However, the market has improved enough for Intelsat to complete its long-delayed offering now, Musey said. The company previously had requested and received extensions from U.S. regulators to postpone the offering.

“Either the company wasn’t ready or the IPO market wasn’t ready,” Musey said. “Now, it appears they finally are both ready at the same time.”

The market for telecom and media IPOs comes and goes in waves. When the market is ripe, the opportunity needs to be taken. “It is very hard to time exactly the right moment,” Musey said. “When it is open, you go.”

For existing shareholders, they will have the option to sell a certain amount of holdings through the transaction. If the existing investors do sell through the IPO, they would be required to retain their shares for at least six months, Musey said.

The restriction is to help give confidence to the new investors that existing shareholders will not dump their shares immediately after the IPO is completed and drive down the stock price. After six months, a stock would have established a trading value and the company would have reported a couple of quarters of earnings, Musey said.

Technology Boost

Roger Rusch, president of the Palos Verdes, Calif.-based TelAstra satellite consulting firm, said the stock market likely would consider Intelsat a hybrid between a high technology company and a telecommunications service provider. The stock market valuations of technology stocks have increased substantially over the past year, while telecom stock prices have not risen quite as much.

Intelsat specifically has improved its business prospects with its recent acquisition of the U.S. satellite assets of Loral Skynet, Rusch said. That combination helped to position Intelsat for an IPO, he added.

“From an investor perspective, the longer-term prospects look excellent because HDTV [high-definition TV] will increase demand. No doubt the original investors will benefit from developments over the next few years. Overall, it looks like a win-win situation for both Intelsat and the investment community,” Rusch concluded.

–Paul Dykewicz

(Diane VanBeber, Intelsat, 202/944-7406; Kevin Leclaire, SpaceVest, 703/904-9800; Armand Musey, NearEarth, 646/452-9931; Roger Rusch, TelAstra, 310/373-1925)