While many industry observers did not feel the Zeus Holdings Ltd. purchase of Intelsat was in any danger of falling through following the recent satellite failures Intelsat experienced, most would have guessed that the purchase price would have dropped at least the value of the IS-804 satellite that failed last month and possibly a bit more with the diminished capacity of the Intelsat Americas-7 following its blink last November (SN, Jan. 24; Dec. 6, ’04). But that did not happen. Intelsat announced Jan. 28 that it closed the acquisition transaction with Zeus, a consortium of private equity companies that was formed to purchase the satellite operator. The consortium consists of Apax Partners, Apollo, Madison Dearborn Partners and Permira. According to the announcement of the sales’ completion, shareholders in Intelsat received the original negotiated price of $18.75 per share, valuing the transaction at $5 billion (including the assumption by Zeus of about $2 billion in debt).

Intelsat spokeswoman Jodi Katz told Satellite News that no details on any changes at Intelsat have been made available yet, and the next milestone for the company will be for David McGlade to take over as CEO, which is expected to occur in March. Zeus named McGlade, a telecom industry veteran with extensive experience in the wireless industry, CEO of Intelsat last month by (SN, Jan. 10). She declined to comment on whether there were any changes to the original negotiated terms of the sale or if any additional conditions were placed on the transaction going forward.

A Surprising Final Price

In reflecting on the fact that the transaction did not end in a renegotiated price, Roger Rusch, president of consultancy TelAstra Inc. told Satellite News that the final price “was a surprise and many of us have been trying to understand the rationale.”

Rusch noted that a renegotiated price does not come without precedent. “Since Panamsat had to accept a lower price due to a satellite failure, it is conveivable that some prescient negotiator included a provision to avoid a subsequent price cut.”

He offered a theory that there could be something in the final sales contract that has not yet been made public. “It is possible that something has not been disclosed,” Rusch said. “For example, there may have been a provision in the original agreement that said the terms are not renegotiable if a satellite fails.”

Rusch noted that a renegotiated price does not come without precedent. “Since Panamsat had to accept a lower price due to a satellite failure, it is conceivable that some prescient negotiator included a provision to avoid a subsequent price cut.”

That would leave Zeus with an all-or-none proposition in its hands.

“If my speculation is correct, then the fixed price only says that the private equity firms wanted to proceed,” Rusch said. He compared his speculation to a real estate sale. “The principals have an incentive to complete the deal because they receive transaction fees, bonuses, etc., if the deal is completed, but none if the deal falls apart. It is not a simple world without conflicts of interest.”

However, other observers took a broader economic perspective in analyzing why the deal went through with an unaltered price.

“It depends on what you expect the value to be based on,” Timothy Logue, principal of TJLNova Consulting told Satellite News.

He noted that Zeus may have made its valuation not on the value of the assets but the value of the revenues those assets generate, coupled with Intelsat having contingencies to cover the recent satellite failures.

That the sale closed without a change in price “may be the indicator that Zeus is more interested in whether these failures affect overall revenues,” Logue added. “The estimation was [the satellite failures] really wont” affect revenues, “but that is my guess.”

Industry Value Rising?

Phelps Hoyt, senior director at Fitch Ratings said the fact that the price didn’t change could be a signal that investors view the value of the satellite market as increasing.

“I think what happened was between August when [Zeus and Intelsat] announced the deal and when they closed it, the value of these businesses increased a bit,” Hoyt told Satellite News.

Hoyt pointed to a key recent event that could be an indication that the overall market valuation is rising: the filing for a $1.2 billion initial public offering of pubic by the equity owners of Panamsat Corp. In its Form S-1 IPO registration statement filed with the Securities and Exchange Commission, Hoyt pointed out specifically that Panamsat’s owners–Kohlberg Kravis Roberts & Co. LP, The Carlyle Group and Providence Equity Partners Inc.–said in the registration statement that a portion of the proceeds will be used to pay a dividend to the owners (SN, Jan. 3). And although Hoyt didn’t mention it specifically, The Blackstone Group, the private equity owners of New Skies Satellite Holdings Ltd., also file for an IPO for its satellite operations with the SEC on Jan. 27, though the capital they are looking to raise according to their registration statement is significantly less ($350 million).

Hoyt said the IPO activity could be an indication that the valuation of the satellite market in general has grown, and this may have been on the minds of those negotiating following the satellite failures.

“It seems to us, if you lose a $100 million satellite, you should lower the price by $100 million,” Hoyt said. However, he added that there because there of the perceived increase value of the satellite industry in general following the IPO, that could have been enough to offset the value of the lost IS-804 satellite.

“As people watch these private equity companies buy the [satellite] operators, they say ‘there’s something going on in this industry.’ They look at the backlog and the stability of the revenues and say ‘it should have a little higher [value]’ and that offsets the loss of the satellite,” Hoyt said.

–Gregory Twachtman (Phelps Hoyt, Fitch Ratings, 312/368-3205; Roger Rusch, TelAstra, 310/373-1925; Timothy Logue, TJLNova Consulting, 703/768-4710)