Wall Street Analysis

The final outcome of PanAmSat’s [SPOT] sale to Kohlberg Kravis Roberts & Co. (KKR) is in limbo due to the failure last week of the satellite operator’s backup xenon ion propulsion system (XIPS). The in-orbit malfunction, following on the previous failure of the spacecraft’s primary XIPS, leaves the satellite operating on its onboard bi-propellant fuel that will be exhausted within three years. The problem will require the launch of a replacement satellite much sooner than if the satellite would have achieved its full scheduled life. The unexpected setback contributed to a 3.8-percent decline in the company’s stock between July 30 and Aug. 5.

A possibility exists that KKR could negotiate a slight reduction in its $4.3 billion purchase of PanAmSat and its assumption of approximately $750 million in net debt. Expect the sale to advance even though KKR legally is entitled to abandon the transaction in light of the XIPS failure. KKR won a hotly contested bidding process, and other financial buyers would readily swoop in if KKR attempts to substantially restructure its offer.

Another key development last week was XM Satellite Radio [XMSR] once again outperforming its guidance during second-quarter 2004. XM’s stock price rose 2 percent between July 30 and Aug. 5. Favorable results and increased guidance that included boosting expected year-end subscribers to 3.1 million from 2.8 million helped to fuel the stock. Despite the slight rise in XM’s stock, it remained down 8.8 percent for the past month.

The DirecTV Group [DTV], the parent company of the largest U.S. satellite TV operator, also is another company that helped its stock price by outperforming Wall Street expectations. The company last Thursday announced its results, achieving an all-time high in gross subscriber additions during the second quarter. The DirecTV Group’s stock price rose 2.8 percent during the one-week period tracked by our Satellite News stock listing. Meanwhile, DirecTV remains down 8.1 percent for the month.

BSkyB [BSY], a London-based satellite TV service, did not follow suit. BSkyB’s stock price dipped 19.2 percent last week, and it was down 19.4 percent for the month. One potential cause – ownership — can be eliminated for the disparity between DirecTV and BSkyB because News Corp [NWS] owns both companies.

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