Countdown Starts for Satellite Giant Merged Intelsat-PanAmSat Must Meet Tough Demands From Private-Equity Firms
By ANDY PASZTOR Wall Street Journal July 3, 2006; Page C3 http://online.wsj.com/article/SB115187800552796539.html?mod=technology_main_promo_left Consolidation and cost cutting have swept across the commercial-satellite industry, but surviving operators are finding growth opportunities as elusive as ever. Intelsat Ltd. and PanAmSat Holding Corp. are set to complete a $3.2 billion merger today, creating a closely held company whose fleet of more than 50 orbiting spacecraft will make it the largest and most diversified global satellite-services operator. The transaction is the end game of three years of intense deal making by prominent private-equity firms on both sides of the Atlantic. The combined company's performance will show how effective the private owners will be in balancing cost cutting with creative investments and strategies for boosting revenue and profit over the long haul. With offerings that include direct-to-home television broadcasting and support for classified U.S.-government operations, the enlarged Intelsat has promised to shrug off the industry's staid image by exploiting burgeoning technologies. Investors who just purchased some $3 billion in high-yield bonds from the two firms will demand significant synergies, little geographic overlap and streamlined management bent on revving up growth in unconventional ways, if necessary. But a close look at the business shows how tough it will be to meet those demands. In an industry with huge capital-investment needs and average annual growth rates hovering around 3% or less, the combined company faces major integration, personnel and marketing challenges to break out of that historical slow-growth pattern. Indeed, before Apax Partners & Co. and the other private-equity owners of Intelsat bid for PanAmSat last August, they agonized over whether the satellite industry could produce the growth rates such investors typically expect. There is reason for concern: In the past, PanAmSat has had to rely on small bits of revenue from specialty consulting contracts -- a minor part of its business -- to meet closely watched revenue guidance for a particular quarter. The combining companies insist they can make a go of it: "This is not going to be satellite operations as usual," incoming Chairman Joseph Wright vowed during an industry conference earlier this year. Mr. Wright has advocated investments that blur the line between space and ground-based systems to better serve consumers. PanAmSat is even experimenting with distributing ethnic programming it owns to various cable-TV systems. Wall Street, while recognizing the benefits of fresh investment dollars, has doubts about satellite-industry strategy. The emergence of private-equity groups as owners has created "a much larger field of banks willing to participate" in satellite debt and equity offerings, according to Carol Goldstein, head of telecommunications and media at ABN Amro Inc. But Heidi Wood, an analyst at Morgan Stanley, said many remain skeptical about space projects. PanAmSat of Wilton, Conn., posted revenue of $213.2 million, up 2.1%, for the first quarter. Intelsat, which is based in Bermuda but has its headquarters in Washington, reported a 4% drop in overall revenue to $280.4 million. The new company is betting big on expanding its business in India and Latin America. At the same time, it hopes to participate in the drive to turn cellular phones and other mobile devices into Internet connections and entertainment centers. With phone and cable rivals maneuvering to tap many of the same markets, satellite firms are searching for novels ways to expand their reach. The biggest immediate financial boost is likely to come from a nearly 40% cut in the combined company's work force, a process that is under way but will take as long as 18 months to play out. Total head count eventually will dive to about 1,000 from 1,400 or so, with PanAmSat executives largely overseeing marketing efforts and Intelsat officials primarily in charge of technical and operating issues. Mr. Wright, who served as PanAmSat's chief executive, said last week that early personnel decisions will make it easier for the combination for proceed. "The major cuts have been made on the front end," he said, with the aim of easing employee uncertainty and boosting the morale of those who are staying. David McGlade, Intelsat's chief executive, who will keep the same title at the merged company, stressed in a separate interview that sustainable growth is the company's ultimate goal rather than cost cutting. That means smarter, smaller bets on new markets, combined with "a lot more discipline than either company has had before," he added. For the next quarter or two, however, some veteran insiders anticipate lackluster results. Combined year-over-year revenue may be flat or even take a dip, they predict, as integration efforts sap momentum from marketing campaigns and other sales initiatives. The satellite companies that succeed will have to avoid the mistakes of the 1990s, when "indiscriminate cash was thrown" at economically flawed projects, said Andrew Sukawaty, chief executive of Inmarsat Ltd., which provides satellite services to ships and other mobile users. ================================================= George Antunes Voice (713) 743-3923 Associate Professor Fax (713) 743-3927 Political Science Internet: antunes at uh dot edu University of Houston Houston, TX 77204-3011 Reply with a "Thank you" if you liked this post. _____________________________ MEDIANEWS mailing list [email protected] To unsubscribe send an email to: [EMAIL PROTECTED]
