After years in an investment black hole, satellites are sexy again

A £6bn takeover flurry signals a new space race among venture capitalists with global ambitions. Miranda McLachlan reports
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In the James Bond movie Diamonds Are Forever, agent 007 foils plans by his arch enemy Blofeld to take over reclusive billionaire Willard Whyte's communications empire and unleash a satellite capable of destroying nuclear targets on earth.

In the James Bond movie Diamonds Are Forever, agent 007 foils plans by his arch enemy Blofeld to take over reclusive billionaire Willard Whyte's communications empire and unleash a satellite capable of destroying nuclear targets on earth.

It is widely assumed that Howard Hughes was the inspiration for the Whyte character in the 1971 film. Mr Hughes's real satellite operations, PanAmSat, later ended up in the hands of another mogul with global aspirations, Rupert Murdoch (ironically the inspiration for the Bond baddie in Tomorrow Never Dies), and have just been sold as part of a multi-billion-dollar space race.

The battle for control of the handful of companies that dominate global fixed satellite networks has intensified after a spate of takeovers in the past year totalling nearly £6bn. Further rounds of rationalisation are expected, with satellite operations increasingly under the ownership of a tight coterie of international private investment companies.

Unlike Blofeld, the private equity firms don't want to hold the world to ransom. Their appetite for satellites is driven by the more pragmatic lure of long-term cashflows and access to low-cost loans to fund such deals. The relatively low growth profile of the satellite operators, and the unpopularity of technology stocks over the past few years, have until now made them relatively unattractive to stock market investors.

But last week, a consortium of venture capitalists successfully bid $5bn (£2.7bn) for the second-biggest operator, Intelsat, famous for providing a means of communication between the US and Russia during the Cold War. The successful bidders were Apax Partners, Apollo Management, Madison Dearborn Partners and Permira. They beat a rival bid led by Kohlberg Kravis Roberts and Blackstone, as well as offers from Intelsat's peers.

Mr Murdoch's sale of the listed PanAmSat for $3.4bn to a consortium made up of Kohlberg Kravis Roberts, Carlyle Group and Providence Equity Partners was finalised a day later.

Intelsat's chief executive, Conny Kullman, told The Independent on Sunday that the private equity consortium had offered $18.75 per share, compared to about $13 a share that the company would have raised through a flotation. Intelsat, whose largest shareholders were the aerospace giant Lockheed Martin and France Telecom, dropped flotation plans in May.

"If you look at our assets and our businesses, we're very strong in terms of cashflow," said Mr Kullman.

Venture capitalists were also attracted by Intelsat's capital expenditure: it recently bought eight new satellites. The company was now well positioned, added Mr Kullman, to take advantage of an expected shake-up in the industry, with the consortium's financial expertise providing "a platform for more consolidation".

He believes further rationalisation is needed: "I think you're going to see consolidation at all levels. Private equity firms are obviously looking to generate greater efficiencies."

Other recent satellite buyouts include the sale of London-based Inmarsat to Apax Partners and Permira for $1.5bn last October, and Blackstone Group's purchase of the Amsterdam-listed operator New Skies Satellites for $956m in June. New Skies has just released its second-quarter results, showing a free cashflow position for the six months to 30 June of $86m, against $36m in the same period last year.

Williams de Broë analyst Morten Singleton says further consolidation is likely in the industry. He believes future targets will also be at the lower end, with the purchase of "single- satellite or smaller multi-satellite companies''.

While the biggest operator in the world market, SES Global, is an attractive target, it has so far remained a public company. A bid for the group is potentially problematic: Investors wanting to raise their stake above 20 per cent need to secure approval from a major shareholder, the government of Luxembourg.

But a bigger hurdle may well be encountered in the form of another major shareholder, GE Capital, according to SES Global's head of investor relations, Mark Roberts. The American financial giant acquired its stake in 2001 as part of the sale of its Americom business to SES. Its shares were issued at €12 (£8) each but the stock is currently trading at about €7, so it may be reluctant to sell. Several analysts believe the shares are undervalued, given the company's strong earnings stream, 80 per cent of which comes from long-term contracts.

According to Dresdner Kleinwort Wasserstein, the Intelsat deal values the company at 6.6 times estimated 2004 earnings before interest, tax, depreciation and amortisation. This "underpins the current market valuations of SES Global at 7.1 times estimated 2004 Ebitda'', DKW says. SG Cowen Securities analyst Tom Watts says there have been no signs of potential offers for SES Global, the last main fixed satellite player.

While private equity firms may start to consolidate their assets, Mr Watts says only Apax and Permira, with their purchases of Intelsat and Inmarsat, are set to own more than one operator. "And it is not clear where the synergies between Intelsat and Inmarsat would be."

European group Eutelsat is another potential target for venture capital groups, following failed attempts by both Intelsat and PanAmSat to buy it for about £3.5bn. Eutelsat is owned by investors including private equity groups Lehman Brothers, Eurazeo of France and De Agostini of Italy.

The growing queue of private suitors looking to snap up satellite players signals a turnaround for the industry. Satellite operators, along with other technology stocks, fell out of favour when the tech bubble burst several years ago. Concern grew about overcapacity, particularly after high expectations of satellite broadband growth had to be cut back to more realistic levels.

However, satellite operators' revenues are now being bolstered by increased use of satellite television, a pick-up in demand for broadband and, in the US, the provision of communication services to the government in areas such as defence. Future drivers are expected to be the growth of high-definition television and two-way broadband (both of which require far more spacecraft capacity).

Thijs Berkelder at stockbroker Petercam says private equity groups will help drive the industry forward. Public ownership has been problematic because the market has found it "difficult to understand the valuation" of the satellite operators. Telecoms companies and other large groups have invested in them, but these have not been core investments, says Mr Berkelder, who adds: "This makes it really difficult for a company to roll out an aggressive strategy."

Private equity firms have the financial capacity to do this, as well as an understanding of the potential rewards. As Mr Berk- elder puts it: "You can make a beautiful return on your money."

So, like Lou Reed, the private equity investors could soon be singing "Satellite of Love".

2004, A SPACE ODYSSEY: THE DEALS SO FAR

SES Global

39 satellites; public company with the state of Luxembourg and GE Capital as its major shareholders.

Intelsat

28 satellites; bought from private owners for $5bn by a consortium of Apax Partners, Apollo Management, Madison Dearborn Partners and Permira.

Eutelsat

24 satellites; privately owned: major shareholders include Eurazeo, Lehman Brothers and De Agostini.

PanAmSat

21 satellites; former public company bought for $3.4bn by a consortium of Kohlberg Kravis Roberts, the Carlyle Group and Providence Equity Partners.

Inmarsat

Nine satellites; bought for $1.5bn by Apax Partners and Permira from private owners including Lockheed Martin, Deutsche Telekom and BT Group.

New Skies Satellites

Six satellites; former public company sold for $956m to the Blackstone Group.

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