Panamsat said July 19 it signed an agreement with Alcatel for the acquisition of the Europe*Star-1 satellite and two orbital slots, giving Panamsat a stronger presence in the European and Middle Eastern markets.

Under the terms of the agreement, Panamsat gains the rights to the 45 degrees East and 47.5 degrees East orbital locations. Ownership of these orbital locations expands Panamsat’s reach, enabling access to new markets in Europe, Saudi Arabia and other parts of the Middle East, Africa and Asia.

“Our strategy right now is to focus on the markets that we know are growing and not to be everything to everybody,” Panamsat CEO Joseph Wright told Satellite News. “This acquisition gets us into Europe in a big way. Our customers, particularly our video customers, have been requesting this for some time. It gives us the capacity we need in the Middle East for the U.S. government. It also gives us the capacity we need for our African customers” which lease capacity primarily for networking rather than video.

Reaction to the transaction by industry observers generally was positive, but there were some reservations offered.

“We view [the purchase] positively and believe it is a cost-effective way for Panamsat to add capacity and expand its product offering,” Jeff Wlodarczak, analyst with Wachovia Capital Markets LLC, wrote in a July 19 equity research report.

D.K. Sachdev, president of Spacetel Consultancy LLC, agreed that the acquisition was a good move. Panamsat’s “competition is expanding, so it is natural for Panamsat to get some assets in different parts of the world.”

Benoit Denis, research analyst at Frost & Sullivan, noted that financially, “it is not a bad deal,” but added that the orbital locations gained are not “prime locations.”

Patrick French, senior analyst at Northern Sky Research, said the purchase “is not going to hurt Panamsat at all,” but noted that Europe*Star has been on the market for at least two years and the two main Fixed Satellite Services operators in Europe, Eutelsat and SES Astra, did not acquire the assets.

PAS-12

The acquired satellite, renamed PAS-12, will enable Panamsat to provide a broad range of enhanced services to European customers for programming distribution, broadcast contribution and enterprise networking. Panamsat said the potential applications it may offer with the satellite and the orbital locations is acquired include new offerings in direct-to-home and high definition television, on-demand satellite services, digital satellite news gathering, as well as support for government satellite communications.

Europe*Star Ltd., a partnership between Loral Space & Communications and Alcatel Space, launched the satellite about five years ago. Loral, during the course of its bankruptcy, pulled out of partnership, leaving satellite manufacturer Alcatel to operate the satellite. The company has been looking to offload the satellite in recent years.

The satellite carries 30 36-MHz Ku-band transponders and will give Panamsat full coverage of Europe for the first time. Prior to the acquisition, Panamsat would provide service to Europe through satellites located over the Atlantic and Indian Oceans. According to information on Europe*Star’s Web site, the satellite has a projected lifetime of 18 years. Wright said he expects the satellite to have between 10 and 12 years of live left in it, possibly a bit longer.

Wright declined to say how much Panamsat paid for the satellite and the two orbital slots, but said the company paid less than half of what it would cost to build, launch and insure a new satellite.

“This [acquisition] puts us right over the top of Europe as well as the Middle East and Africa (collectively known as the EMEA region),” Wright said. “Strategically, it’s terrific for us. From a financial standpoint, it is a much better deal for us than if we built and launched a satellite. And we’ve got a second slot there for expansion.”

Wlodarczak estimated that the purchase price for the satellite and orbital slots was between $60 million and $70 million. Panamsat said an undisclosed portion of the cost would be paid in 2006.

Panamsat said the satellite is expected to contribute approximately $12 million to $15 million of incremental adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) on an annualized basis over the near term. Wright said the earnings would come from existing contracts on the satellite, which currently is about 40 percent utilized.

For Panamsat, it is a good deal because it “is getting to a new market with a distribution network already in place,” Denis said. “They are getting new customers from an existing base and this is worth a lot.”

As for the empty orbital slot, Panamsat is taking a wait-and-see approach and is not rushing to get a new satellite in orbit.

“If we find that that region the demand which we see today, and we get a little history for it, we can put together a joint venture just exactly like we did with JSat a month ago,” Wright said. “But I am not going to jump too fast at that though. Companies in our industry have done that for the past 15 years and I am not going to make that mistake.”

In June, Panamsat announced the formation of a joint venture with JSat Corp., Horizons-2, to launch a new Ku-band satellite. The joint venture was formed on a 50/50 basis and will permit Panamsat to replace the capacity SBS-6 with no capital outlay during the two-year construction period and to make its part of the $140 million investment on terms that are significantly better than it current cost of financing, Panamsat said.

The European Landscape

While the location over Europe was one of the main drivers to this purchase, Wright is not looking at this purchase as a means of coming headstrong into the European market to compete with Eutelsat and SES Astra.

“I don’t look at [this purchase as a way of] going out and competing in the direct markets with Astra and Eutelsat, just like anybody coming in and competing with Americom and Panamsat in the United States would be very tough,” Wright said. “This does not mean we aren’t going to compete with them on certain opportunities.”

Observers downplayed the importance of being over Europe and looked more at the opportunities that could come in Africa and the Middle East

“The more important feature on that satellite, which makes it particularly attractive for Panamsat, are its coverage of South Africa and the Middle East,” French said. Panamsat has a very close working relationship with Multichoice Africa and obviously through its government business, the Middle East region is very important to the company.”

Wright is more looking to other opportunities in the European market. “There are a lot of opportunities, whether our government service or bringing signals from outside of the area to drop into the area or the broadcast services and a lot of these need full global coverage. This [purchase] now gives us that capability in a big way,” he said.

Sachdev said the bulk of the video market will remain with SES Astra and Eutelsat, but this deal “might give Panamsat a little more leverage…in picking up markets which are outside the markets of Astra and Eutelsat.”

For Denis, it comes down to where the acquired orbital slots are located. “It won’t alter [the competitive landscape in Europe] that much. I don’t see the orbital locations as prime orbital locations.”

Future Opportunities

Wright said this acquisition likely is not the last and his company is looking for other opportunities to expand. There are 34 companies that control one-third of the Fixes Satellite Services business and the utilization of those fleets is lower than 50 percent.

“There is no lack of opportunities in this industry right now,” Wright said. “This is a way we are approaching growth in this industry. We continue to look for capacity in the United States and the EMEA region.” Wright declined to offer any specific targets that might be ripe for acquisition.

“We continue to expect further industry rationalization as smaller players sell out to the big…global operators, which are able to recognize material synergies through these types of acquisitions,” Wlodarczak wrote.

However, gaining additional capacity could be a challenge.

“It took two years for Alcatel to sell Europe*Star, but within the industry, in my view, this was one of the easier sales because being a satellite operator is not a core competency for Alcatel,” French said. “A lot of the other operators [that Wright alluded to] are small regional operators where it is seen as a point of national pride to have a satellite operator in country.”

Both Sachdev and Denis concurred, particularly on the point that nationalistic concerns could keep small operators from selling off their assets.

Rather, the likely scenario will be that Panamsat (and other operators) will sign deals that allow it to lease excess capacity rather than purchase assets and orbital locations outright.

“You might see more often [going forward] joint partnerships as opposed to outright purchases because those are easier to do, given that our industry is run just as much by politics and national pride as it is by dollars,” French said.

—Gregory Twachtman

(Benoit Denis, Frost & Sullivan, +33 1 482 81 54 50; Patrick French, Northern Sky Research, pfrench@northernskyresearch; Kathryn Lancioni, Panamsat, 203/210-8649; D.K. Sachdev, Spacetel Consultancy, 703/757-5880; Jeff Wlodarczak, Wachovia, 212/451-2669)