The announced combination of Intelsat and Panamsat will create a large, financially stable Fixed Satellite Services provider with a combined fleet of 53 satellites but could be bad news for the satellite manufacturing industry, analysts said.

While many satellite industry observers were focused on the possibility of Intelsat acquiring New Skies Satellites (SN, Aug. 29), Intelsat surprised the industry with its Aug. 29 announcement to acquire Panamsat.

The announced acquisition “is bad news for the manufacturing industry, particularly in the long term,” Karim Nour, program manager of space and communications for Frost & Sullivan, told Satellite News. He compared this acquisition to the ripple of effect of a big box retailer like Walmart acquiring a competitor. To keep two retailers’ locations supplied with the right inventory, manufacturers will need to produce the appropriate amount of inventory. That manufactured inventory would likely decrease when Walmart acquired its competitor because the manufacturer would only have to service one retailer. “I think there will be a slight reduction in satellite orders,” he said. “It is more of a long-term effect than a near-term effect.”

J. Armand Musey, a partner with boutique investment banking firm Nearearth LLC echoed those sentiments. “Manufacturers and launch service providers have to be thinking hard about this,” he said.

“It certainly could have an impact on satellite manufacturing by lowering the demand for new satellites,” Eileen McGowan, manager of Futron Corp.‘s FCCFilings.com said, noting the merged company likely would have enough capacity to cover its needs for the foreseeable future.

Satellite manufacturers expected a downturn in the short term, but were cautious in their assessments on whether the new Intelsat will cut down on the number of satellites it orders long term.

“The logistics of combining and rationalizing assets and bringing cultures together” will take a while, Ted Gavrilis, president of Lockheed Martin Commercial Space Systems, said Sept. 7 at Euroconsult‘s 9^th World Summit for Satellite Financing in Paris. “When that is done you sit back and carefully study the [future capital expenditures]. But I think there will be a change in how new Intelsat operates going forward.”

“It’s very early in the process to have a definitive conclusion as to what it means to a manufacturer, but we have a concern that as these two companies rationalize their capacity, they likely both will not need to replace satellites that have overlapping capacity,” Patrick DeWitt, president and COO of Space Systems/Loral told Satellite News. “We will be assessing that ourselves and making that judgment, but it is a concern we have. It’s really too early in the process to reach a conclusion on whether this merger will have a severe impact on the demand for satellites. We will have to watch it carefully throughout the next three years.”

Bernard Schwartz, chairman and CEO of Loral Space & Communications, said the combination of Intelsat and Panamsat will have some impact on satellite manufacturing orders, but not a radical one. “Orders in the future will be down, but they will still have to respond to advances in technology and what’s in the sky will not meet those demands,” he said at the Euroconsult event.

Panamsat has been one of the biggest customers for Orbital Sciences Corp.‘s small geostationary communication satellite, ordering five, including the recently announced Horizons-2 spacecraft. Ali Atia, president of Orbital’s Geo Communications Satellite unit, said he does not think Intelsat will abandon the small spacecraft movement.

“I know Panamsat carefully embraced the strategy of small satellites in its fleet,” Atia said. “It’s hard to predict the future about what the combination will mean, but I am pretty optimistic that the advantages of small satellites will lead them to order more of those when you look at the [capital expenditures] advantage.”

Intelsat said the net result of the merger could be an increase in contracts.

“I would anticipate that the market would continue to grow,” particularly as the U.S. government continues to use more commercial satellite capacity, Jodi Katz, Intelsat spokeswoman, told Satellite News. “The merger should be good for the industry as a whole because it would create a stronger company with the capability to develop new technologies to support government or video customers. That being said, the manufacturers and the operators would actually be working together to provide the capacity to support these growing applications. I think on another level, they have a common interest of keeping satellite growing in terms of competing with fiber. I think it would be positive for the manufacturing side of things.”

Even if the acquisition leads to a reduction in manufacturing contracts, McGowan sees other areas that could pick up some of the slack, particularly with the mobile satellite constellation operators needing to build and launch replacement satellites. She also noted that eventually, the merged entity will need to replace satellites as well.

“It might hurt,” McGowan said. “It might hurt a lot, but I don’t think it will necessarily end life as we know it.”

Anti-Trust Issues

Speculation on how this merger will affect the satellite manufacturing market could be moot if the merger does not clear regulatory hurdles.

“It wouldn’t surprise me if the government says no,” International Space Business Council President Scott Sacknoff told Satellite News. Sacknoff compared this transaction to the proposed merger between Echostar Communications Corp. and DirecTV, which was rejected by the U.S. Federal Communications Commission, in part because it would decrease competition for consumers.

However, because Panamsat and Intelsat are not consumer-focused companies, anti-trust oversight might not be as significant.

“From a U.S. regulatory perspective, it definitely raises anti-trust market dominance issues,” McGowan said.

If the acquisition is approved, many observers also believe the merged entity will have to divest satellites in order to gain government approval, though Intelsat CEO David McGlade told reporters during an Aug. 29 conference call that he believed the merger would go through without needing to get rid of any satellites.

“We have very complimentary businesses. Intelsat has been strong around the world, especially in developing countries with the telecommunications business, broadband, corporate networking,” McGlade said. “Panamsat has a strong presence in the Americas with its video business. We feel from a product standpoint, there is not too much overlap. From a customer standpoint, there is very little overlap. From a regional standpoint, the competition is really within the region and more importantly, with the fiber companies. We look at them as our main competitors, so we feel we are in a position not to have to divest satellites and we are going to take that position with all the regulatory authorities.”

Industry observers were not as confident.

“I am sure as they go through it, they will have to divest something,” Sacknoff said. “The U.S. government forced Intelsat to get rid of essentially New Skies so they wouldn’t hold a dominant position in the world. Panamsat is much bigger than New Skies. If regulators thought the additional seven [satellites] caused a competitive imbalance, why would anyone think that 21 would be a slam-dunk approval?”

Musey agreed and suggested that it could be the satellites Intelsat acquired from Loral as part of Loral’s bankruptcy proceeding that could be put back on the market as a condition of the government approving the acquisition.

–Jason Bates and Gregory Twachtman

(Eileen McGowan, FCCFilings.com, 301/347-3431; Jodi Katz, Intelsat, 202/944-8223; Scott Sacknoff, ISBC, 703/524-2766; Dee Valleras, Lockheed Martin, 215/497-4185J. Armand Musey, NearEarth, 646/452-9931)