Satellite Colossus Emerges From Deal

Intelsat, PanAmSat join forces to create largest satellite operator in U.S.

Intelsat's landmark acquisition of PanAmSat positions the company as the world's largest satellite operator. Intelsat paid $3.2 billion in cash to acquire PanAmSat's 23 satellites and associated ground facilities and also assumed $3.2 billion in PanAmSat debt. First announced last August, the deal closed last week. It passed Department of Justice antitrust muster in May and got the FCC's approval last month.

The scope of the new Intelsat is enormous. SES Global, previously the largest satellite operator, has $1.6 billion in annual revenues and 43 satellites. Intelsat now has roughly $2 billion in revenues, 51 high-power satellites in operation and five more under construction, and some 1,800 customers.

During the World Cup, Intelsat and PanAmSat's combined satellite fleets transmitted more than 35,000 total hours of coverage, with 20,000 hours carried by Intelsat and 15,000 by PanAmSat.

While Intelsat has traditionally served international markets such as Africa and Asia and carried more data and voice traffic than television feeds, PanAmSat has been strong in North and South America. It holds much of the cable network distribution business in the U.S.

“Intelsat is coming in with more of a telco focus, but the real jewel is the video business at PanAmSat,” says Avi Steiner, an analyst at KBC Financial Products, which deals in Intelsat's securities. “They have long-term contracts, and they have the cable neighborhoods in place.”

Changing its focus

By integrating PanAmSat's stable of broadcast and cable customers, Intelsat's revenue mix changes considerably. Some 63% of Intelsat's revenues had come from network services and telecom customers and 20% from government and military contracts. Only 17% came from media clients, mostly for providing links for global events like the Olympics. Now the company projects 38% of 2007 revenues will come from media clients, with 47% from network services and telecom customers and 15% from government.

Intelsat's carriage of video will continue to increase. “All of our customers want video, voice and data now, even our government customers,” says CEO David McGlade. “It's not just command and control; they're also looking at entertaining the troops.”

Intelsat has been working steadily to integrate PanAmSat since last fall. It has picked the systems it will use for everything from back-office functions to satellite control, with combining sales teams the final step. PanAmSat CEO Joseph Wright is chairman of the new Intelsat, and PanAmSat Chief Operating Officer James Frownfelter is COO.

The company will have 1,000 employees, about a 25% reduction from the pre-existing outfits. Intelsat has consolidated satellite operations and control in its Washington, D.C., headquarters and centralized customer service at PanAmSat's facility in Ellenwood, Ga. PanAmSat's offices in Wilton, Conn., will be closed.

One hiccup in the deal was a lukewarm reception last month for a debt offering designed to help finance the acquisition. Intelsat was forced to cut the offering of high-yield debt from $3.5 billion to $2.9 billion. McGlade downplays the shortfall, noting that Intelsat was already fully funded coming into the transaction thanks to bridge financing from a group of investment banks. He says the reduced bond sale was simply a function of timing, as the junk-bond market deteriorated in June. “There is certainly a good appetite for investing in our bonds,” he says. “It's just a matter of the costs being higher because [market] conditions worsened.”

Analyst Steiner agrees that market conditions were mostly to blame. “The market clearly was soft,” he says.

Clients of both satellite providers are optimistic about Intelsat's future. “Consolidation does bring some fear into people's minds,” says Rich Wolf, senior VP of telecommunications & network origination services for ABC, a longtime customer of both PanAmSat and Intelsat. “But we're hoping that management will devote the right resources to being the premier domestic satellite operator.”

Looking ahead, Intelsat sees the expansion of high-definition programming as a growth driver, along with new video platforms such as mobile and telco TV. The company is providing satellite capacity to Qualcomm to help distribute programming for its MediaFLO mobile video service, to launch this fall.

Intelsat is also targeting the IPTV market, particularly smaller telcos, with its Ampiage service launching this summer. It has built a “super-headend” at its technical operations center that will aggregate content, encode it as a digital multiplex, encrypt it, and deliver it via satellite with advanced MPEG-4 compression. Telcos can then take the IPTV package and distribute it on their local networks. Says McGlade, “We're getting some deals to distribute the service, and we're going to continue to look at how flexible it can be as opportunities present themselves.”