Wall Street Analysis

By Paul Dykewicz, PBI Media LLC

The sale of PanAmSat [SPOT] and the first-quarter earnings announcement from Sirius Satellite Radio [SIRI] were the top industry stories for Wall Street last week. Several of my sources suggested the $23.50 price Kohlberg Kravis Roberts & Co. (KKR) agreed to pay for PanAmSat was slightly higher than expected, despite falling below the stock’s price the day before the sale was announced. ABN AMRO’s Patrick Fuhrmann, director of the investment firm’s satellite research team, said KKR’s price was 4.4-percent higher than his target of $22.51.

The deal valued PanAmSat at $4.3 million, including the assumption of $750 million in net debt. The price also valued PanAmSat at 7.2 times estimated 2004 earnings, rather than the 7 times estimated 2004 earnings Fuhrmann had expected. He concludes PanAmSat’s current debt level may have been artificially low by delaying capital expenditure for new and replacement satellites. Overall, Fuhrmann concluded that the price was “fair” for the buyer and for the seller: The DirecTV Group [DTV].

KKR officials have been tight-lipped about their specific plans for PanAmSat. However, Fuhrmann expects the investment firm to take the company private, to “lever up” its balance sheet for a special dividend in the near term, to pay down debt with future cash flow, and then to float an initial public stock offering (IPO) sometime during the next three to five years.

As far as New York City-based Sirius is concerned, the company’s 90,600 net new subscribers during the first quarter fell slightly short of consensus Wall Street estimates of 100,000. Nonetheless, company officials confirmed their guidance of reaching 1 million subscribers by year’s end. Expanded distribution through EchoStar Communications [DISH], RadioShack [RSH] and Wal-Mart [WMT] should help Sirius fulfill its promise, said Bob Peck, a satellite analyst at Bear Stearns. The mildly-lower-than-expected subscriber count held revenues to $9 million for the quarter to dip below Peck’s estimate of $10 million.

With regulatory approval of PanAmSat’s sale expected to pose no problems and Sirius tracking fairly closely to its guidance, two of the big question marks in the industry prior to last week appear to have satisfactory answers. The challenge going forward is for the management of both companies to execute on their strategies, and not to be derailed from achieving long-term growth by any short-term distractions.

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