Ten years ago, few would have dubbed a merger between Intelsat and Panamsat as “a marriage made in the heavens,” but no one would have conceived of such a union. In today’s commercial satellite environment, however, no combination of entities is impossible. Intelsat CEO David McGlade discussed the future of the two companies in rosy terms Oct. 20 at Washington Space Business Roundtable luncheon, in a talk dubbed “Intelsat and Panamsat: A Marriage Made in the Heavens.”

McGlade presented his views on how the two companies’ corporate cultures would be merged, the synergies they provide as a combined entity, and the business dynamics of working in an environment driven by private investors. He also expressed a strong belief in the future of Ka-band, specifically via Intelsat’s investment in satellite Internet provider Wildblue as well as the need for the satellite industry to promote its unique capability to provide ongoing service in the wake of disasters, such as Hurricane Katrina.

McGlade calls himself a “convergence man,” referring to his background in voice, broadband, cable and wireless services; and as the CEO of cellular operator O2 UK prior to taking the position at Intelsat (SN, Jan. 10). He said that although it is complex, the satellite industry is “in some ways very much the same” as its terrestrial counterparts. The past two decades have seen much change in the communications sector. Intelsat, likewise, is at “a point of change” due to its ownership by private equity firms, he said.

Growing With Private Equity

Responding to arguments whether private equity firms will allow Intelsat to purchase additional satellites, McGlade strongly affirmed Intelsat’s ability to expand. Apollo Management, a 25-percent owner of Intelsat, not only has allowed Intelsat to grow but has driven Intelsat’s “boldest move” ever: the merger with Panamsat.

But even if the merger was not taking place, in the cases of both Panamsat and Intelsat, private equity owners have demonstrated their willingness to invest in the satellite operators. McGlade pointed to the Intelsat Americas-9 satellite, which is under construction, and the contract Panamsat signed in April with Orbital Sciences Corp. for the PAS-11.

“Private equity firms are focused on financial management,” McGlade said, but for future wealth creation they have to build the businesses in which they invest. As a result Intelsat will be able to continue to invest in its future.

Merger Challenges

To make the Intelsat-Panamsat merger a success, Intelsat will have to overcome several hurdles, including addressing Panamsat’s debt load, clearing any regulatory challenges and merging the corporate cultures to create a solid entity going forward, McGlade said.

Intelsat has refinanced or assumed about $3.2 billion in debt of Panamsat and its subsidiaries. and the way to overcome that debt load is “to grow,” McGlade. In the past two years Intelsat has invested about $2 billion in new satellites and is ready to “reap the benefits.”

The merger still must garner approval from both the U.S. Federal Communications Commission and the Department of Justice. Many industry observers believe the merger will not be approved without some conditions, with some suggesting that the merged entity might have to divest some satellite assets (SN, Sept. 12). McGlade discounted competition concerns, because the two companies’ combined fleets will complement each other, given that there is little overlap in the services Panamsat and Intelsat provide. Panamsat’s fleet comprises spacecraft with more fixed landmass coverage, whereas Intelsat’s satellites typically provide transoceanic links with more flexible beams. Panamsat has a “video heritage,” with an “Americas focus,” while Intelsat, on the other hand, has worked more prevalently in developing countries, he said.

And while the operational and regulatory issues need to be addressed, the key to making this merger work in the long run will be how effectively the new management team is in uniting the different corporate cultures of the two companies, McGlade said. Many mergers fail when they do not spend enough time and effort to integrate cultures, he said. McGlade outlined numerous committees, comprised of both Intelsat and Panamsat employees, which will help merge the two companies and create a combined culture, as well as delineate the branding, mission and vision that the new Intelsat will encompass.

The Future In Ka-Band

Intelsat is looking at the growth of Ka-band services with a keen eye, McGlade said, citing the company’s investment in Wildblue, a Ka-band broadband communications service provider in North America. “Ka-band is a new frontier for us,” he said, adding that Wildblue’s service ramp-up, along with a partnership with the National Rural Telecommunications Cooperative, demonstrates the “proven demand for broadband in underserved areas of the United States.”

At the same time, pricing for Ka-band service to consumers is dropping, making it difficult for ventures like Wildblue and its partners, McGlade said. As a result, the companies will have to further analyze customer uptake of Ka-band services to determine when it will make sense to launch a dedicated Ka-band satellite for Wildblue, he said.

McGlade also expressed pride in Intelsat’s response in providing much-needed communications services after Hurricane Katrina, citing the company’s quick provision of network back-up for cellular companies like Cingular and Nextel, as well as Intelsat’s work with the Red Cross and the U.S. Department of Homeland Security.

He quoted Federal Communications Commission Chairman Kevin Martin as saying after Hurricane Katrina, “We cannot rely solely on terrestrial communications.” As a result, the satellite industry must “bang the drum” with government officials around the word about the benefits of satellite communications, McGlade said.

–Cynthia Boeke