The Blackstone Group could keep its controlling interest in New Skies Satellites [NSK] for around seven years. The private-equity (PE) firm recently completed the acquisition of New Skies for $956 million in cash (SN, June 14). However, the company admits it may be in the satellite industry for a while to maximise the return on its investment.

Satellite News recently spoke with two leading figures at the Blackstone Group who were behind the deal to acquire New Skies. In terms of how long the company plans to stick around in the satellite industry, Lawrence Guffey, senior managing director at Blackstone, commented, “I don’t think this industry is different from any other in which PE would invest. A typical horizon is between four and seven years. It could happen faster. But we look at this as a typical investment horizon. I think it may take that long for supply- and-demand fundamentals to fully improve.”

The deal to acquire New Skies is one of many significant deals in the satellite sector, which has seen companies like New Skies, Intelsat and PanAmSat [SPOT] attract major PE investment. David Tolley, a principal at Blackstone, believes these firms coming on board will lead to an era of greater profits for the satellite industry. “The sector today is unhealthy, when you consider what has happened to pricing and asset utilization over the last several years,” he told us. “If the industry is to earn a reasonable return on capital, the first order of business would be to improve utilization of existing assets. Then, of course, the industry will need to invest in new facilities to accommodate growth and deploy new technologies.”

Why New Skies?

The investment in New Skies is a major strategic bet, so what was it in particular about New Skies that attracted Blackstone? According to Tolley, “New Skies, we think, offers some of the best growth opportunity in the industry for a couple of reasons. Firstly, it services markets where there is better underlying secular growth and demand for the services, where either terrestrial communications infrastructures are poor or economic growth is rapid. The nature of the book of business at New Skies also bodes well for growth. There is no analog capacity in the fleet; it is all-digital. So there is no headwind to growth, which is somewhat unusual in the sector.”

Guffey added, “It is an industry with strong fundamentals, if one looks back historically with a long-term perspective. We feel that the supply-and-demand fundamentals will improve. We felt that New Skies was particularly well-positioned to capitalize on an increase in demand given where their excess capacity is. The excess capacity is in markets we think will turn more quickly and more profoundly in the intermediate term.”

Tolley admitted his company had been looking at acquisitions in the satellite sector for a number of years prior to acquiring to New Skies, commenting, “We have been looking for transactions in the sector for about three years. When the decline that took place in the telecom market began, we really had identified these businesses that were good and strong fundamental businesses that are attractive to the leveraged finance markets, which is an important part of how we buy businesses.”

He continued, “The owners were also not necessarily the right set of long-term owners of the business. We didn’t think the incumbent PTTs viewed their stakes in these businesses as strategic. We thought these were good businesses that were leveragable in a sector with good growth characteristics that would come loose at some point.”

Positives About The Satellite Industry?

While New Skies had some particularly interesting dynamics, Tolley believes that there were many positives in terms of investing in the satellite sector. “I think one of the most interesting things about the sector from our perspective is that the sector has been around for 37 years since the inception of commercial satellite services,” he said. “With the exception of one year, it has grown every year for 37 years. We believe there is an extremely attractive underlying growth story. It has been a story that has been difficult to see for the last several years because of the over-supply of capacity that has pressured pricing downwards. If you look at the underlying growth that is going on in the business in terms of the utilisation of the facilities, there is really great fundamental growth there.”

Even recent flat revenue numbers in the sector can be a little deceiving. “You have the potential for a reasonably rapid return to healthier asset utilization. If you could have held prices flat over the last four years, you are looking at it as a growth industry,” Tolley added. “It is an industry that grows with economy and, in some cases, a little better in a lot of regions in the world.”

One of the challenges now will be to gain a return on investment (ROI) as quickly as possible. However, while the satellite industry retains some attractive dynamics, the fact remains that a number of satellite operators have seen flat revenue growth in recent years. With over-capacity still prevalent in a number of markets, such operators as New Skies still face a number of challenges. In response to this, Tolley commented, “That is entirely driven by pricing and low asset utilization in our view. Forget about revenues. How many transponders of capacity are being utilized globally? The only issue is that people put up too much capacity. They were counting on too much growth, and utilization plummeted. Therefore, so did pricing. I think, over time, that will reconcile itself.”

Business As Usual

For New Skies, it is now very much a case of business as usual, but with new owners. Tolley is confident that the existing management team will drive strong profits in the future. “As professional investors, we typically want to add value at the board level but not at the operating level. While we think we understand the FSS industry reasonably well, Dan (Goldberg, New Skies’ CEO) and his team understand it much better than we do,” he told us. “We are comfortable we are backing the right people. We are the owners of the company at the end of the day, but we put a lot of stock in what Dan and the team believe about operating strategies, capital investment strategies and strategic initiatives. They will take the lead on those issues on a day-to-day basis. I don’t see any fundamental shifts in strategy.”

One of the major issues in terms of the influx of PE firms in investing in the satellite sector is the potential impact it will have on satellite manufacturers. At the recent EuroConsult-sponsored “World Summit for Satellite Financing” in Paris, it was suggested that the influx of PE firms would lead to a much greater financial discipline in satellite operators as well as a potential reduction in new satellite orders. The satellite-manufacturing arena is already pretty crowded, so this could have major implications for satellite manufacturers.

Tolley, however, believes such financial discipline will be of long-term benefit to satellite manufacturers. “In the long run, disciplined spending is clearly better for the satellite manufacturers. As a manufacturer, if you desire any predictability in the business, rather than go through these boom and bust periods, you need your customers to operate rationally and maintain a healthy level of asset utilisation,” he said. “I don’t believe the satellite-manufacturing industry is well-served by customers that deploy significantly more capacity than they need. It is just not sustainable.”

(John Ford, The Blackstone Group, [email protected])