Expectations that Intelsat would remain a long-term fixed satellite services (FSS) survivor may be worth reassessing in light of its recent Securities and Exchange Commission (SEC) filing that reveals talks have been held with prospective investors interested in buying the company.

The unexpected development comes as Intelsat is approaching a June 30 deadline to complete its proposed initial public stock offering (IPO) to comply with provisions of the ORBIT Act previously passed by Congress. Intelsat’s SEC filing revealed it had suspended talks with its potential suitors, at least temporarily, to focus on the IPO.

However, Intelsat’s April 22 SEC filing was clear in stating that those conversations could resume once the IPO situation is resolved.

Another intriguing development is the introduction of a new bill in Congress aimed at giving Intelsat a third extension of its IPO deadline. Sen. Conrad Burns, a Montana Republican and chairman of the Senate Commerce, Science and Transportation Committee’s communications subcommittee, is sponsoring the bill to push the deadline back one full year, until June 30, 2005. The bill also proposes to give the Federal Communications Commission (FCC) the authority to grant an extension of six more months, to the end of 2005. The intent is to allow market conditions to improve before forcing Intelsat to go public.

That bill, S. 2315, was introduced at the request of Lockheed Martin [LMT], Intelsat’s largest shareholder with a 24 percent stake in the global FSS company, industry officials said. “Right now, the market is simply not conducive for a successful IPO,” Burns said. “If we do not move quickly, several U.S. entities who are major investors in Intelsat stand to lose hundreds of millions of dollars because the telecom market for IPOs is far from ideal.”

Intelsat officials would welcome “additional flexibility,” said Susan Gordon, the company’s director of corporate communications. Meanwhile, company officials are “mindful” of the June 30 IPO deadline and working to achieve it, she added.

Another near-term problem facing Intelsat is that it risks losing most of the customers and revenues it expected to gain by its recent $1 billion-plus purchase of Loral Skynet’s North American satellite assets. On April 16, the FCC denied a request by Intelsat to delay the company’s obligation to notify those customers they are free to choose another service provider at the end of a 180-day “Special Temporary Authority (STA)” that the agency issued to the company March 17. Direct-to-home, video, and Ka-band services are affected.

More than 90 percent of the revenue generated from the assets Intelsat acquired from Loral could be lost under terms of the ORBIT Act, the company estimated in its SEC filing. The 180-day period that is due to expire Sept. 13 was intended to allow time for customers of what had been the North American satellites of Loral Skynet to transition to another service provider. That notification was required to be completed by April 16 – the same day the FCC’s International Bureau denied Intelsat’s request for an extension.

For Sale?

The discussions Intelsat officials have had with potential investors broached the possibility of either selling stakes or the entire company, according to Intelsat’s amended F- 1 filing to the SEC last month.

“Some of these investors or groups of investors submitted non-binding preliminary indications of interest,” according to the filing. “However, for a number of reasons including the June 30, 2004, deadline under the ORBIT Act by which we must conduct an initial public offering and the resulting time constraints and limitations placed on the process, we have suspended this process.”

Once the IPO is completed, Intelsat may explore the “possibility” of another party investing in or acquiring the company, Intelsat officials said. If such talks resume, Intelsat may still opt not to pursue any such transaction.

Prospective Intelsat investors were informed in the filing that such a sale, if undertaken, could affect the value of the company’s shares and could result in its sale at a price that is different than the prospective IPO offering price of between $12 and $14 a share.

“Any such transaction could materially impact our business, financial condition, methods of operation and future business strategies,” Intelsat explained in its filing. “We cannot determine today whether or when such a transaction might occur or, if it were to occur, what its structure or terms might be. Whether we decide to pursue such a process following completion of this offering and the outcome of any such process will depend on a number of factors.”

Many of those factors, such as the level of interest by potential investors, and the economic and market conditions at the time such a transaction is evaluated, would be beyond the company’s control, its officials said. Such uncertainties could affect the company’s value and should be weighed by potential investors in Intelsat’s IPO, according to Intelsat’s SEC document. Such investors should not make any assumptions about “whether, when or on what terms” any such transaction may occur, the filing warned.

The timing of that surprising disclosure is all the more interesting because officials of PanAmSat [SPOT] announced April 20 that their company accepted a $4.3 billion offer to be acquired by KKR. PanAmSat’s attractiveness was reflected by 18 prospective bidders that each possessed the financial wherewithal to pursue a purchase, said Jim Frownfelter, PanAmSat’s COO.

With 18 qualified bidders and only one able to buy PanAmSat, 17 others are left that could follow-up by shifting their focus from PanAmSat to Intelsat.

With Intelsat weighing its options, an extension of the June 30 IPO deadline could give it much-needed time to maneuver.

W. Neil Bauer, president and CEO of the Acton, Mass.-based Orion Associates satellite consulting firm, said he believed any relief Intelsat can receive to ease its time pressure in completing an IPO would be “beneficial.”

The recent competition for PanAmSat resulted in several major financial investors analyzing the satellite industry, Bauer said. The interest of those investment firms could be rekindled by similarly attractive satellite companies, such as Intelsat, he added.

“Due to the current difficult market conditions for IPOs, it could be a very enlightening exercise for Intelsat to test its market valuation with large investors as perhaps a viable alternative to its IPO,” Bauer said.

Another industry observer agreed that Intelsat would gain from additional time but no guarantees exist that market conditions would improve by next year.

Steve Symonds, president of the Symonds & Associates consulting firm in Wilton, Conn., said trying to time an IPO is “always a tough call.” On one hand, “glimmers of life” are returning to the satellite telecommunications market as the overall economy improves, Symonds said. For example, U.S. satellite TV service providers DirecTV and EchoStar Communications [DISH] are doing “quite nicely,” he added.

On the other hand, it still is “too early” to declare that the FSS satellite market has fully recovered from an economic slowdown during the past few years, Symonds said.

“With an extension in hand, Intelsat would have the option to time the IPO so that it can gain as much ‘wind in the sails’ as possible,” Symonds said. “But the problem is no one knows whether conditions will be better in a year.”

If Intelsat gains the extension, waits and the market improves, company officials look like geniuses for gaining a delay, Symonds said. If the market deteriorates, much second- guessing will transpire.

Roger Rusch, president of the Palos Verdes, Calif.-based TelAstra consulting firm, is a staunch proponent of the IPO proceeding by June 30 as planned.

“I think these are pretty good times for an IPO or for a private placement of a FSS company like Intelsat,” Rusch said. “Certainly, the active interest in PanAmSat by several financial institutions is a good sign. Furthermore, with the FSS due diligence that has been done, it seems that Intelsat should look like an attractive purchase opportunity.”

Intelsat is profitable and has many long term contracts to sustain its revenue streams, Rusch said. “When an IPO is issued, there is often great excitement about the prospects for future growth,” he said. “Space by itself offers a glamorous background for investment. The FSS business should not suffer from the bad image created by Iridium, Globalstar, ICO, and Orbcomm. These MSS (mobile satellite services) companies were startups, but FSS is established and has a good track record.”

Buyers of an IPO, however, generally lack extensive and in-depth research of their own about specific companies and industries, Rusch said. As a result, such IPO investors typically rely on the reports of Wall Street analysts that sometimes seem to have been prepared through rose-colored glasses.

Intelsat picked up additional in-house financial acumen in March when it named William Atkins, a seasoned investment banker, as CFO. Prior to joining Intelsat, Atkins was a managing director of Morgan Stanley, where he held other senior positions during the past nine years. Those roles include heading the firm’s corporate finance activities in Europe and an earlier stint in leading its telecommunications corporate finance practice in Europe.

Regulatory Risk

Most private companies need to focus on turning a profit but Intelsat’s unique heritage as a former intergovernmental satellite organization (IGO) leaves it with regulatory baggage and uncertainty. For example, the FCC will decide if the company has complied with the requirements of the ORBIT Act to dilute the former IGO’s ownership base. For that reason, company officials acknowledged in the company’s recent amended F-1 statement filed with the SE C that an IPO may not be sufficient.

If the FCC determines that Intelsat failed to comply with the criteria set forth in the ORBIT Act, the agency is directed by the Act to impose limits or deny applications for satellite licenses and renewal of satellite licenses by Intelsat, according to the company’s SEC filing. The FCC further would be able to limit or revoke previous authorizations for the company to use satellite capacity to provide certain services to, from or within the United States.

The services that the FCC could prevent Intelsat from offering include such high-growth areas as Internet access, high-speed data and video transmission.

“If we were prevented from providing capacity for these services, our revenue and the value of our business would be significantly adversely impacted, and we could fail to realize almost entirely the positive impact on our revenue that we expect as a result of the Loral transaction,” said documents filed with the SEC. “We would also be unable to implement important aspects of our business strategy, including our strategy to expand our customer base for video applications.” Failure to complete an IPO on terms that meet the requirements of the ORBIT Act could result in the breach of covenants that are contained in Intelsat’s existing debt instruments or in future debt-financing deals, Intelsat acknowledged in the document.

When operating as an IGO prior to its July 2001 privatization, Intelsat enjoyed privileges, exemptions and immunities in the United States and many other countries where it provided communications services. Benefits lost since the company’s privatization included immunity from government regulation and from competition laws as well as tax exemptions.

In addition, the IGO’s owners held stakes in the organization, and they formed the principal customer base. Those shareholders accounted for approximately 89 percent of Intelsat’s 2001 revenue but only 53 percent for 2003.

Because the IGO’s owners received investment shares based on their percentage of use of the organization’s satellite system, many viewed using the services as a way to boost their stake in the entity, according to Intelsat’s SEC filing. As a result, operating as an IGO likely provided it a competitive advantage. Because its shareholders no longer have their stakes tied to use of Intelsat services, they may opt instead to increase their use of rival telecommunications services providers, thus hurt the company’s future revenue and profitability.

–Paul Dykewicz

(Susan Gordon, Intelsat, 202/243-5072; E. Neil Bauer, Orion Associates, 987/263-1142; Kathryn Lancioni, PanAmSat, 646/293-7415; Steve Symonds, Symonds & Associates, 203/834-2766; Roger Rusch, TelAstra, 310/373-1925; Conrad Burns, U.S. Senate, 202/224-2644)