An announcement about the sale of global satellite operator New Skies Satellites N.V. [NSK] to a private- equity firm appears to be only weeks away, and it could be followed not long thereafter by the sale of its much bigger rival Intelsat Ltd.

The deals are not linked but financial investors are champing at the bit to deploy their capital and to tap the steady cash flow from the long-term contracts of fixed satellite services (FSS) that makes them tempting targets. New Skies officials previously acknowledged that the company had hired premier Wall Street investment banking firm Goldman Sachs to represent it in soliciting buyers. Last week, the satellite operator announced it had reached “advanced negotiations” with a private-equity firm interested in acquiring the company.

If the company is sold, an announcement last week from New Skies made clear the transaction’s price per share would be greater than its share price of $7.2446 a share at the close of trading last Monday.

Wall Street rumblings and press reports point to the Blackstone Group as the leading contender to buy New Skies. Those same sources put the deal’s likely price at around $800 million (665 million euros). Using ABN AMRO’s forecast of $106.9 million in cash and zero debt at year-end 2004, New Skies has an enterprise value $815.955 million ($7.85 per share).

ABN AMRO’s leveraged buyout (LBO) analysis estimates that a private equity investor can expect an internal rate of return (IRR) of between 28 percent and 30 percent based on last Wednesday’s valuation and depending on the length of the investment. In contrast, the investment firm estimates an IRR of between 23 percent and 27 percent for KKR’s investment in PanAmSat [SPOT].

New Skies, a relatively small global satellite operator that has five in-orbit satellites, also disclosed last week it had received proposals from other third parties, and it is in concurrent discussions with all the prospective bidders.

Tim Logue, a telecommunications consultant in the Washington office of the Coudert Brothers law firm, said he thinks the timing of the prospective sale of both New Skies and Intelsat are only related due to the “great interest” that large private-equity firms have taken in satellite communications companies.

“The timing is perfect for them, since smart money invests when valuable assets are underpriced,” Logue said.

Andrea Maleter, technical director at Bethesda, Md.-based satellite market-research firm Futron Corp., said either or both New Skies and Intelsat ultimately could be consolidated with PanAmSat [SPOT], a Wilton, Conn.-based satellite operator that was sold to Kohlberg Kravis Roberts & Co. (KKR) for $4.3 billion last month.

“In general, the financial investors go into this are looking for assets that have high value, but even higher operational costs that can be reduced, thus increasing the overall value before a further selloff,” Maleter said. The downside, she added, could be that there are no significant cost savings to be achieved, or if investors overpay for a complete company and can’t repackage or resell the assets at a profit.

“All current discussions contemplate a sale of substantially all of New Skies’ assets and liabilities for cash at values representing a premium to the company’s current share price,” said Elizabeth Hess, vice president of corporate communications at New Skies. The company’s sale would allow the existing investors of New Skies to cash out of their investment and let the existing business continue to be operated by the new owner.

However, any agreement to sell New Skies’ assets would be subject to the approval of the company’s management and supervisory boards. A transaction, once agreed upon, would be subject to a number of other conditions including approval by New Skies’ shareholders at an extraordinary general meeting along with any regulatory approvals.

“In view of these conditions, New Skies anticipates that a transaction would be completed, and liquidating distributions paid to shareholders, no sooner than the end of 2004,” Hess said. On the other hand, a winning bidder could be announced in the coming weeks, resulting in an earlier-than-anticipated completion date.

New Skies management publicly acknowledged a quick turnaround in slack demand for satellite transponders in several regions of the world is not likely to occur. Instead, shareholder value best may be maximized by the company’s sale, wrote J. Patrick Fuhrmann, a satellite analyst who heads satellite communications equity research at ABN AMRO, in a research report last Wednesday. He believes a sale announcement for New Skies is “imminent;” however, a 10-percent jump in the company’s sale price last Tuesday due to speculation about a sale leaves “limited” upside potential for existing investors. For that reason, Fuhrmann downgraded New Skies to “sell.”

Heightened IRR

“We believe a higher expected IRR is warranted for New Skies given the relatively higher risk associated with New Skies’ business compared to PanAmSat’s,” Fuhrmann wrote to his clients. His reasoning is that New Skies has thinner margins, it has shorter contracts, it faces tougher competition in voice and data and it has less redundancy in its fleet when compared with PanAmSat. Indeed, New Skies currently trades at 6.6 times 2004 estimated enterprise value (EV)/earnings before interest taxes, depreciation and amortization (EBITDA), versus the 7.2 times multiple offered for PanAmSat by KKR, he explained.

“In a scenario where a private-equity investor will look for an IRR comparable to our estimate of KKR’s expected return with PanAmSat (approximately 27 percent IRR), we estimate the top offer price is about $8.50,” Fuhrmann wrote.

Bidding War?

One unknown variable that could drive the deal’s offering price higher than current valuations is competition between the private-equity investors for New Skies. Such a bidding war could drive down IRR hurdle rates, thus increasing the price that potential bidders may offer to acquire the company, Fuhrmann said. Somewhat alleviating the competitive pressure for such a bidding war is that Intelsat also is on the block. Intelsat announced May 21 that it was withdrawing its planned initial public stock offering (IPO) for the second time and that company officials would resume exploring previously disclosed discussions involving a potential sale to a private-equity firm.

“We believe the same investors interested in New Skies are interested in Intelsat,” Fuhrmann said. Management realizes that growth in today’s market is difficult, and that low interest rates and aggressive bidding by private-equity investors have created an environment where shareholder value is maximized by selling off the company, as opposed to waiting for demand to strengthen, Fuhrmann explained.

As a company, New Skies has good disclosure practices, it has sought and received approval from its shareholders to strategically buy back shares on favorable terms, and it has held frequent investor road shows to provide timely status reports about the company’s operations, Fuhrmann noted.

New Skies CEO Dan Goldberg, an attorney who seems to take his fiduciary duty to enhance shareholder value as seriously as any industry executive, acknowledged in the company’s first-quarter 2004 earnings conference call earlier this month that robust growth is not expected anytime soon.

On May 5, New Skies reported first-quarter 2004 results that were well-below ABN AMRO’s expectations and likely below consensus estimates, Fuhrmann wrote to his clients. ABN AMRO’s first-quarter 2004 estimates of flat sequential results should not have been difficult for a FSS company to achieve, because such an enterprise experiences “very little, if any,” seasonal revenues, Fuhrmann explained.

“We believe the results show the company has been competing aggressively on price to win contracts in a very difficult market still plagued by over-capacity and soft demand,” Fuhrmann wrote to his clients.

The good news for New Skies in first-quarter 2004 was that its free cash flow (FCF) reached a record high $27.2 million, driven by capital expenditures of only $2.2 million versus his estimate of $17.1 million, Fuhrmann noted. The lower capital expenditures stemmed from a “timing difference” in the construction cycle for the planned NSS-8 satellite.

For the year, management at New Skies is offering guidance of between $70 million and $80 million in FCF, including a one-time payment of $32 million from Intelsat to resolve the rights to use the orbital slot at 121º West Longitude. ABN AMRO is estimating 2004 FCF of $89 million at New Skies – topping the guidance of the satellite operator’s management.

–Paul Dykewicz

(Elizabeth Hess, New Skies Satellites N.V., +31 6 2906 2492; Tim Logue, Coudert Brothers, 202/736-1816; Andrea Maleter, Futron Corp., 301/347-3450; J. Patrick Fuhrmann, ABN AMRO, 212/409-6769)