Wall Street Analysis

By Paul Dykewicz, PBI Media LLC

The likely sale of PanAmSat [SPOT] was reflected in reports from two satellite analysts last week who focused on the valuation of the company and its newly renamed parent rather than leaving any doubt that a deal would occur.

By renaming Hughes Electronics as The DirecTV Group and changing the ticker from HS to DTV, the News Corp-led [NWS] organization is positioning itself to focus attention and resources on its satellite television operation. Thomas Eagan, a satellite and cable analyst with Oppenheimer, issued a research note Friday just before press time predicting that DirecTV Group’s PanAmSat [SPOT] and Hughes Network Systems (HNS) business units would be sold. He also forecast a combining of the two News Corp-owned Latin American satellite television operations.

A rationalizing of the company’s divisions will enable DirecTV Group to report higher company cash flow growth while more easily showing it trades at a lower multiple on a cash-flow and per-subscriber basis than Wall Street analysts previously had calculated, Eagan explained.

The satellite TV operation of DirecTV Group has an estimated 2004 cash flow of 35 percent, compared with 32 percent for all the parent’s operations combined. The parent company’s current trading multiples suggest that the U.S. satellite TV unit is valued at slightly more than $1,700 per subscriber, 15.7 times 2004 estimated cash flow and more than 40 times 2004 estimated free cash flow. In comparison, EchoStar is higher priced on a per-subscriber basis but equivalent on a cash-flow basis. A sale of PanAmSat and HNS would further widen that valuation gap between DirecTV and EchoStar – spurring Eagan to rate DirecTV Group a “buy” for investors.

Patrick Fuhrmann, a satellite analyst with ABN AMRO, said speculation about the sale of PanAmSat now has the company’s stock price fully valued. PanAmSat’s negotiating power to boost the price further appears limited due to a “small universe of potential buyers,” he added. Overcapacity is expected to “plague” the sector for at least another year and the company’s backlog is on the decline, Fuhrmann concluded.

Paul Dykewicz is senior editor and senior analyst of Satellite News. He can be reached at 301/354-1769 or at [email protected].