Spectrum Offers Most Value for MSS Industry, Forum Told

The amount of spectrum and the opportunity to use it with ancillary terrestrial component service would seem to make a transaction attractive, but Thomas Watts, managing director of Cowen & Co., said he has been waiting for a deal since 2004. “The ATC spectrum has been out there since 2004 waiting to do a deal. Companies are going forward with business plans but the value is still in the spectrum. I get up every morning waiting to see if this is the day we will get a deal,” Watts said.

An MSS merger could face regulatory scrutiny because the FCC essentially set up a duopoly in the MSS bands, with Mobile Satellite Ventures and Inmarsat in the L-band and ICO Global Communications and TerreStar Networks in the S-band, said attorney Maury Mechanick, ex-Intelsat and Comsat. “If the players consolidate, you will be giving one player a significant amount of spectrum,” Mechanic said, and “that runs counter” to how the commission usually operates.

There aren’t a lot of investors in the MSS industry, said Mark Piegza, former managing director of media and telecom group at Banc of America Securities. “It is a small number of players who believe they understand the spectrum value,” Piegza said. One of the biggest investors in the MSS industry is Harbinger Capital, which during 2007 made investments in Inmarsat, MSV and TerreStar. “Harbinger Capital was the support of the MSS industry,” said Tracy Mehr, managing director of media & telecom investment banking of Credit Suisse.

The 700 MHz spectrum auction is winding down, opening up an opportunity to invest in MSS-ATC spectrum, said Hoyt Davidson, managing partner of Near Earth: “The next block of valuable spectrum is MSS-ATC.” How that spectrum will be valued in relation to the 700 MHz auction and other recent wireless auctions is unclear. Currently, the value Wall Street places on the MSS companies indicates a significant discount compared to the auction spectrum prices, Piegza said.

Where Watts sees an opportunity with the ATC prospect, Michael Gordon, managing director of telecom & media for Merrill Lynch, thinks ATC could be a drawback. Investors don’t know what to do with ATC. They want to see existing customers, which most of the MSS players don’t have, and the idea of building an ATC network from scratch is “daunting,” Gordon said.

Omar Jaffrey, managing director of global head satellite services for UBS Investment Bank, is bullish on mobile entertainment and he believes MSS will use its ATC spectrum to offer mobile entertainment. ICO’s business model is based on mobile entertainment. MSS mobile entertainment will be going up against established entertainment like satellite radio, Jaffrey said. “Satellite radio has an advantage. They have satellites in space. They have spectrum. They have applications,” he said.

Inmarsat is a different type of MSS company because “it is still a tremendously profitable business,” said James Murray, managing director of Morgan Stanley. Piegza agreed Inmarsat is different because it “is a big business with large cash flows.” Inmarsat’s recent transaction involving Stratos Global where Inmarsat financed a third-party buyout by Canadian Investment Partners with an option to buy the company when its distribution agreement ends next year is an example of things to come, Murray said.

EchoStar’s recent investment in TerreStar is interesting, Piegza said, but he isn’t sure what EchoStar hopes to gain from it. There continues to be speculation that the direct broadcast satellite companies want to enter the MSS space but years after Rupert Murdoch said he would own an MSS company, EchoStar’s recent investment is the first move either DBS player has made into the MSS sector. Now Murdoch is exiting the DBS sector, Piegza said. -- Heather Forsgren-Weaver

Satellite Finance Forum Notebook…

Intelsat’s recent private-equity transaction, in which a syndicate of private-equity bankers named Serafina bought out Intelsat’s former private-equity owners is probably the last deal of its kind, speakers at the Forum said Monday. “Intelsat is probably the last leveraged buyout we will see for a long time,” said Niraj Shah, director of investment banking for Citigroup Global Markets. The reason: The credit meltdown, several speakers said. “There was a demarcation point: Before the credit crunch and after credit crunch,” said James Murray, managing director of Morgan Stanley. “The market was wide open and has slammed shut,” Murray said. Intelsat will have a hard time going to the equity markets to pay down the debt it incurred in the Serafina deal, Murray said, adding that to raise the amount of capital necessary would leave little for shareholders. A leveraged buyout of either DirecTV or EchoStar is “hard to imagine,” he said. Satellite financing will be more in line with traditional financing, said Dara Panahy, partner with Milbank, Tweed, Hadley & McCloy. Transformational deals in the fixed services sector “are a thing of the past,” he said: “Smaller deals around the edges are much more the order of the day.” An example of smaller deals would be regional consolidation, he said, echoing the comments of several speakers. “There are parts of the world that desperately need consolidation to rationalize the market,” he said. Two areas that come to mind are Latin America and Asia. Satellite deals will happen if companies are patient and have good backlogs, Panahy said. “Much of the satellite industry is simple: If you have a good customer with good backlogs, you will be able to finance transactions,” he said.

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ViaSat’s decision to build a Ka-band satellite to add satellite broadband capacity changes the fundamentals for investors, said Thomas Watts of Cowen and Co. ViaSat has been a company that consistently had 20 percent growth with significant cash flows on the balance sheet. With its plans to build ViaSat 1, that will change. “It is sort of like when you buy real estate for the view and they build a 40-story building in front of that view. You now have a good location next to a big building but it is a different investment than you originally made,” Watts said. The market has punished ViaSat since it made its announcement Jan. 7. ViaSat’s stock closed at $32.59 on that day but was trading at $20.80 Monday. This is an overreaction, said Hoyt Davidson, managing partner of Near Earth. Davidson believes the market will be strong for satellite broadband for more than three to five years as some fear, he said. The fears are based on a belief that DSL and cable modems will eventually build out and the market for satellite broadband will disappear, he said. That won’t happen, said Osvaldo Ramos of Lehman Brothers. “There are 20 million homes that will be under- or un-utilized for DSL or cable modem,” Ramos said. Global broadband penetration is only 20 percent so there’s a great opportunity for growth, he said. The biggest challenge for satellite broadband is capacity, he said.