In what has the potential to be the start of a new trend, a private equity firm is in negotiations to acquire the financially troubled Mexican satellite operator Satmex. Private equity firms (PE) have been making headlines recently with their acquisitions of global satellite operators, but this move could signal a shift in private equity investment from global operators to regional ones.

The group in question eyeing Satmex is Mexico City-based Constellation Group, an investment vehicle created for the takeover effort. According to a Dec. 13 Reuters report, the group has pledged a cash infusion of $120 million and would assume more than $700 million in debt to rescue the company. The Constellation Group represents at least four other satellite operators, including Spain’s Hispasat, which are looking to boost capacity and reach more clients across the Western Hemisphere.

The purchase could go a long way to help the cash-strapped company. A representative from Satmex declined to talk about the company’s discussions with the Constellation Group, however a source familiar with the situation spoke to Satellite News on the condition of anonymity. The source said Satmex is “negotiating with its constituents,” including its shareholders, creditors (holders of both the company’s floating rate notes and high-yield bonds) as well as the Mexican government.

Satmex has been “pursuing negotiations for the last month trying to find a solution that is constructive for everybody and permits the launch of Satmex-6,” the source said. Satmex-6 is built, but is currently sitting in storage at Arianespace’s French Guiana launch site because Satmex is financially unable to put the satellite in orbit.

Satmex’s financial difficulties have been well documented. The company is carrying about $525 million in existing debt to its creditor, which includes a default in June on the capital portion of the debt for the floating rate bonds and a November default on high-yield bonds. An additional $188 million in debt is about to mature on Dec. 29. That debt is between Satmex shareholders and the Mexican government, but Satmex has guaranteed that debt.

However, the source is confident that the company can work through the negotiations and find an equitable solution and continue to remain operational. “Even though Satmex has defaulted on its debts and creditors have the ability to accelerate the debt by now, there is good faith in the negotiating going on,” the source said. “And in spite of those deadlines, Satmex and its constituents are sitting together and talking and looking for a solution.”

The source did not, however, offer an opinion on whether the Dec. 29 deadline on the debt to the Mexican government would have any impact on the current negotiations, but said that “the government and the creditors have been entitled to further legal action, but none has been taken.” The source added that Satmex throughout all of this has been operating normally.

Specific details on how the debt may be restructured or perhaps forgiven have not been made available and the source made no comment on the sale’s potential impact on Loral Space and Communications Ltd.’s 49 percent ownership stake in Satmex. Loral spokesman John McCarthy declined to comment on the negotiations.

However, the source said “Everybody needs to take a hit to get to a good solution.”

An Ambitious Goal

What stands out thus far regarding the sale are the future projections Constellation Group is making for a potential turnaround if its acquisition bid is accepted. According to the Reuters report, Constellation Group believes that if its offer is accepted, it could get Satmex back in the black in a year and raise revenues between 20 percent and 25 percent within a 30-month period.

“It is ambitious in a very competitive North American market,” Timothy Logue, principal of TJLNova Consulting, told Satellite News. “This is an ambitious objective for a company that has been losing market share.”

Roger Rusch, president of consultancy TelAstra Inc. agreed that Constellation Group’s projected turnaround is an ambitious goal.

“If they make a statement like that, there may be a reason for it,” Rusch told Satellite News. “It may be they have a specific application or they know of a specific need that can be satisfied. It’s usually not a good idea to say ‘this is stupid’ because they may know something we do not know. It is also possible they are flat out wrong and conventional wisdom is right. Conventional wisdom would say [the forecasted turnaround] is a very ambitious target in this environment.”

Rusch added that contributing to that conventional wisdom is the fact that the market has not panned out the way many observers thought it would.

“We are not seeing the kind of growth we were hoping for,” Rusch said. “The return to strong growth in transponder sales has not come about as fast as we thought.” Rusch did hedge his comments by adding that “A lot of us thought [the transponder sales growth] should start about now so maybe [Constellation Group’s projected turnaround] is not off that far.”

More PE Money For Regionals?

From a broader industry perspective, Constellation Group’s efforts in Mexico could open the door to a wave of private equity investment in regional satellite operators.

“I think it is the next gradual step for the investment community,” Christopher Baugh, president of independent market research firm Northern Sky Research, told Satellite News. “It is this herd mentality that is taking the shape of private equity actually getting into the operator business and now that the Intelsats and Panamsats of the world have been sold, it makes sense” that private equity firms are looking at regional operators for the next investment opportunity.

Logue was a bit more hesitant to say the potential investment in Satmex by Constellation Group is signaling a trend. “Once case does not necessarily make it a trend, but it is something to watch,” Logue said. He noted that Satmex “is a special case because of its long standing financial problems, some due to internal issues and some due to the Loral bankruptcy, so they have become vulnerable and they have been looking for a way out of their situation.

Rusch also noted that Satmex’s position might have opened the door to private equity consideration. “Satmex has really been suffering,” Rusch said. “They have been trying to raise enough capital to launch [Satmex-6] for some time and they could not make it go. The impression you get is they have had difficulty selling their capacity whereas other people have been more successful in selling capacity.”

But Baugh warned potential investors to be sure and due the necessary diligence in the operators they are considering investing in, because investing in the regional market is different from investing in a global company. “When you get down to the regional level, you have got to be a more discerning investor in terms of where and how you enter the business,” Baugh said. “The global guys like Intelsat and Panamsat have built really strong business cases, have existing lines of businesses and strong fleets. On the regional side, you are getting into a completely different dynamic. Much more validation needs to be done, especially with a company like Satmex, which has for a while now been in a difficult financial position.”

And while the trend of private equity investments in regional operators may or may not materialize, industry observers are predicting that there will be consolidation within the regional markets.

“In various regions, some of the satellites are quite empty and some are quite full,” Rusch noted. “It leads you to believe that there are factors that are causing that. It may be salesmanship. It may be other things that have to do with the network or the system. We generally have an overcapacity situation that is causing problems.” And that overcapacity could ultimately be a driver towards consolidation.

“We will certainly see consolidation with at least a handful of regional operators throughout the next one to two years,” Baugh said, adding that the best consolidation opportunities are in Asia.

–Gregory Twachtman

(Christopher Baugh, Northern Sky Research, 407/352-5295; Roger Rusch, TelAstra, 310/373-1925; Tim Logue, TJLNova Consulting, 703/768-4710)