With the prospect of having a single owner managing the company one step closer to reality, Hughes Network Systems (HNS) Chairman and CEO Pradman Kaul is looking toward new growth opportunities.

Skyterra Communications Inc. announced earlier this month it was acquiring the final 50 percent ownership stake in HNS from The DirecTV Group Inc. Skyterra acquired a 50 percent stake in HNS from DirecTV in December 2004 and at that time became the managing partner of HNS (SN, Dec. 14, ’04).

“There was a period of uncertainty there,” Max Engel, analyst with Frost & Sullivan‘s space and communications group, told Satellite News. Now “they are owned by one institution. They know where they are supposed to go and they can reasonably expect it will be the same in six months as it is now. That is invaluable. Now they are in a position where they really can make plans and move aggressively, as they certainly have the ability to do, on new ventures like Spaceway.”

Skyterra officials did not respond to repeated attempts to contact them to discuss the acquisition.

Future Challenges

“I think the key challenge is to continue to grow,” Kaul said. “As you know, the DSL folks and the cable folks are very aggressive and are doing a lot of good stuff in the market. We have to continue to find our niches and continue to compete effectively. Now we have a new satellite based competitor in Wildblue. It is important for us to continue to innovate and create niches where the satellite offering is unique and has and advantage over anything terrestrial that is available in those niches.”

Kaul believes having Skyterra as the sole owner will come into play as HNS seeks to innovate and create those new niches.

Skyterra has an ownership stake in Mobile Satellite Ventures (MSV) and Terrestar Networks Inc., two companies that are looking to be significant players in the emerging Mobile Satellite Services market that will use a combination of satellite and terrestrial wireless infrastructure to ensure true ubiquitous coverage of its communications network. Also, Skyterra is an affiliate of Apollo Management LP, which has an ownership stake in Intelsat. In August, Intelsat announced it reached agreement to acquire Panamsat.

“We have an owner that is sympathetic to the satellite communications industry and has the ability to create investments and partnerships with these other companies like MSV, Intelsat and Panamsat that can potentially help our business,” he said.

In fact, the mobile satellite business has always been a significant part of HNS’ business and one segment Kaul sees as growing in the near and long term. “We have been in the mobile satellite business since the 1970s and throughout the last five years, we have garnered around $1 billion worth of contracts for mobile networks. Mobile connectivity is one of the strongest business arenas we are keeping an eye on for future growth.”

Growing Equity

While HNS is exploring new opportunities for future business advancements, its current operations, centered around the Direcway satellite broadband service, appears to be gaining customer strength, based on its current subscriber numbers it achieved in 2005 and the price Skyterra agreed to pay for the second half of HNS.

When Skyterra acquired its original stake, it paid about $360 million in cash and Skyterra stock for the first 50 percent of HNS. For the balance, Skyterra paid an additional $100 million in cash. On paper, it may look like Skyterra paid less, but Kaul explained the equity in the company after the first transaction was about $110 million. The price Skyterra paid also reflected debt, both new and old, Skyterra took on as part of the transaction. With the latest transaction, the debt remains the same, but the equity increased.

The equity portion of DirecTV’s interest in HNS “has essentially doubled in value from round one to round two,” Kaul said. “The equity part of the company’s balance sheet was $110 million [after the first transaction] and is going to be $155 million” when the transaction reaches its expected closing date in the first quarter of 2006.

HNS also continues to grow, signing up about 10,000 gross additional subscribers per month for its Direcway satellite broadband service, with about 5,000 to 6,000 net new subscribers per month when accounting for churn. Previously, Kaul has said that HNS remains profitable because the company does not spend heavily on marketing to boost its subscriber totals. Kaul said HNS will keep its business plan intact for the immediate future. “We at this stage are still continuing on the same basis where we are not investing heavily on sales and marketing,” he said.

However, Kaul hinted that HNS likely will look for more aggressive growth with the launch of its Spaceway 3 satellite, planned for the end of 2006. Spaceway 3 will serve as the key focal point for HNS to grow its position in the overall broadband market.

No Significant Changes Expected

Kaul said that he expects to see no significant changes when Skyterra closes the transaction to become the sole owner of HNS, noting that Skyterra did not make any sweeping changes when it took over managerial control over the company.

Skyterra “came in and they have been working closely with us for the past year,” Kaul said. “I think they were satisfied with our cost structure. I think they were content with what we had done on our own in reducing costs.”

–Gregory Twachtman

(Max Engel, Frost & Sullivan, 210/247-2404; Judy Blake, HNS, 301/601-7330)