SATELLITE FINANCING: ARE DOORS OPENING IN 1999?
by Peter J. Brown
(Via Satellite; 03/25/99)
Mar. 25, 1999 (VIA SATELLITE, Vol. 14, No. 3 via COMTEX) -- In the closing
moments of this century, the global satellite sector has come to a crossroads.
The search for new opportunities in the developed markets of Europe and North
America intensifies as many if not all major infrastructure projects in Asia
are on hold, and as questions about the economic fragility of Latin America and
Russia remain. The satellite sector is not abandoning developing markets
altogether, but it seems to be refocusing its efforts and awaiting what amounts
to a sharp increase in new capacity worldwide.
The concept of the satellite fleet with all of its operational advantages is
not obsolete by any means; however, the emphasis is shifting as constellations
emerge. As a result, Iridium now commands the lead role in terms of the number
of satellites deployed, and in terms of setting the tone in financial markets
for almost everyone following in close pursuit.
Fingers are crossed as Iridium exits the theoretical realm, and begins to fly
in the real world with all the anxiety that is attached to a business plan
entering an execution phase. The satellite industry sees Iridium's ability to
carry out its well-publicized mission as critical to the next requisite round
of confidence-building in the financial sector.
"All eyes are fixed on Iridium. After taking 11 years and spending $5 billion,
Iridium's ability to launch within 45 days of their projected target date is
truly remarkable," says Sarah L. Porter, managing director of Ascent
Communications Advisors, L.P. in New York. "Iridium's early success will also
affect other satellite projects, and not just the telephony projects."
The promoters of the high yield market, the public equity market and private
funding sources as well now seem to be aggressively scouting satellite ventures
and displaying a degree of receptivity that have been absent for much of 1998.
Vendor financing remains a key support mechanism as well.
"You have to be very case specific," says Robert Berzins, high yield media
analyst at Lehman Brothers in New York. "No generalizations apply. What we have
right now is a market environment where people are quite skittish about
developmental companies. People are demanding higher rates of return than just
a few months ago."
CD Radio captured everyone's imagination in November when CD Radio-a unique
mobile entertainment concept a la satellite-revived the notion that millions of
dollars are preparing to leap from the sidelines into hands of the right
players with the right degree of business savvy. More on this in a moment. Will
others share in CD Radio's good fortune? That remains to be seen.
A quick scan of the skies indicates that the Clarke Belt is brimming with GEO
satellite capacity. And more satellites will start arriving quickly in 1999.
"There is an enormous amount of new GEO capacity coming on line in the next
two years," says satellite communications analyst J. Armand Musey at C.E.
Unterburg Towbin in New York. "Loral is more than doubling its capacity. And,
the same is true for Panamsat and GE Americom. It is hard to see demand
increasing in a manner such that it has the ability to absorb that capacity.
The introduction of HDTV, which is seen as a transponder hog, may act as a
savior, but it is not going to save everything.
"At the same time, we are going to see a surge in data services. It remains to
be seen if a spurt of new Internet applications can offset the additional new
fiber that will be installed over the next two or three years," Musey adds.
"The spike in transponders will drive transponder pricing down worldwide, which
will lower expectations on the earnings side accordingly. However, the
overcapacity will not be evenly distributed. Some regions will be affected more
adversely than others."
The global market has an enormous appetite for capital. In this regard, the
infinite boundaries of space and the boundless dreams of numerous aspiring
satellite entrepeneurs are not necessarily synchronized with the finite
resources and the fairly predictable cycles of the financial world.
"There is a real crunch coming in 1999 and extending on into 2000. This past
year was a wash, and the whole market has been delayed. As a result, the number
of IPOs in 1999 will expand to incorporate those that have been postponed,"
says Teal Group Corp. Space Analyst Marco Caceres in Fairfax, VA. "In the
coming months, systems that everyone is betting on, like Teledesic and Hughes'
Spaceway, will be revealing their updated cost estimates and capital
requirements. In 2000, Teledesic could grow its projected total cost from $9
billion to $15 billion or more. These higher projections, combined with
Teledesic's need or desire to diversify away from a dependence on private
capital alone, could almost dry up the IPO market, creating a shortage of
capital with negative consequences for smaller start-up companies in particular
that are planning their own IPOs."
Teledesic LLC announced in April that Prince Alwaleed Bin Talal Bin Abdul Aziz
Alsaud of Saudi Arabia was investing $200 million in Teledesic. Alwaleed is the
nephew of Saudi Arabia's King Fahad. The largest individual shareholder in
Citicorp, he made a profit of more than $6 billion when Citicorp was acquired
by Travelers Group Inc. in 1998. Teledesic declines to discuss this and other
relevant financial information.
"Teledesic currently is privately funded. Teledesic successfully raised more
than $1 billion in equity during 1998, including $200 million from His Royal
Highness Prince Alwaleed Bin Talal of Saudi Arabia and $750 million from
Motorola. Plus, Teledesic's founding investors-telecommunications pioneer Craig
McCaw and Microsoft Chairman Bill Gates-are investors with long-term vision,"
says a Teledesic spokesperson. "Further, we do not consider raising capital to
be one of our significant challenges. Beyond that, as a private company, we
don't provide detailed information on our financing or plans."
1998: not the best year to engage the market
Satellite companies that ventured out in the financial sea in 1998 found the
waters to be very bumpy indeed. Telesat Canada, Orbcomm Global LP and ICO are
among those that probably would have preferred to have stayed firmly tied to
the dock.
Telesat Canada plans to finance its Anik F program through a combination of
public/private debt and banking facilities, according to Ted H. Ignacy,
Telesat's vice president of corporate development in Gloucester, Ontario. In
June, Telesat Canada finalized a loan agreement with a syndicate of Canadian
lenders providing a revolving five-year term credit facility for $250 million
Canadian dollars ($166 million). Telesat's construction of its Anik F satellite
is on schedule for a launch in early 2000, according to Paul D. Bush, Telesat's
vice president of corporate development, and Telesat's Nimiq satellite, which
will be used by BCE's Expressvu DBS service, among others, is slated for launch
in early 1999.
In August, the company decided to postpone its $150 million note issue due to
adverse conditions in the credit market. This unsecured note issue had been
assigned a rating of "BBB" by both Dominion Bond Rating Service and S&P.
"Though early indications of investor interest were strong, the markets
deteriorated significantly during the week of our road show," Ignacy said in
late January. "Telesat may access the Canadian dollar market when conditions
return to a more favorable environment. In the interim, short-term financing
has been arranged through incremental banking arrangements."
Virginia-based Orbcomm Global LP withdrew its IPO in July due to the adverse
conditions in the market.
Orbcomm's partners, Orbital Sciences and Teleglobe, have been and continue to
be quite firm in their support. "We pulled the IPO last July, but expect to
come back when conditions are better. The company has made terrific progress
and its partners are funding the business," says Scott Moskowitz, senior
managing director at Bear Stearns.
On December 1, 1998, Teleglobe Inc. paid approximately $65.5 million for the
15 percent stake in Orbcomm held by Technology Resources Industries Bhd (TRI)
of Malaysia. This makes Teleglobe a 50- 50 partner in Orbcomm with Orbital
Sciences.
London-based ICO Global Communications Services Inc. went forward with its
simultaneous IPO and high yield debt offering. ICO plans to deploy 12 Hughes-
built mobile communications satellites, 10 operational and two in-orbit spares,
for C-band and S-band transmissions. According to Caceres, ICO's biggest
obstacle is its lack of an FCC license.
As of October, ICO had raised $2.8 billion in equity and debt and projects a
total cost of $4.6 billion. TRW's decision to invest $50 million after settling
its patent suit with ICO is also noteworthy, according to Caceres.
The IPO that ICO completed in July came up short of expectations. The company
hoped to raise $380 million at $16 to $19 per share, but ended up selling at
$12 per share. However, ICO has a unique structure and is in good shape,
Caceres says.
The closed market for IPOs and high yield debt financing, in the summer and
fall of 1998, has been the most significant factor when the state of satellite
project financing over the past year is examined. As the curtain was coming
down, ICO and Orbcomm became victims, Porter says. Now, the high yield market
is showing signs of opening up. And on the equity side, satellite users such as
Iridium and Globalstar are coming back to market, and Internet-related IPOs are
being completed.
CD radio wears a crown in 1998
On November 16, 1998, CD Radio Inc. announced that affiliates of New York-
based Apollo Management L.P. would purchase $135 million of newly issued
preferred stock. At CD Radio's option, Apollo could purchase an additional $65
million of preferred stock.
"However, with our stock at around $35, we may seek more opportunistic
financing, said Andrew J. Greenebaum, CD Radio's executive vice president and
chief financial officer. "For now, we are just going to let the dust settle. We
have enough cash to get through next year. Of the $900 million we have raised
to date, approximately $500 million is now equity. This gives us the
opportunity to do the balance in the high yield market.
"We've been successful in financing because we have a very complete and
focused business plan that holds together under a lot of different scenarios,"
Greenebaum adds. "The market recognizes this."
With an objective of airing 100 channels of satellite-delivered programming to
U.S. motorists, CD Radio is scheduled to launch in early 2000 with a monthly
subscription fee of $9.95. The first of three Space Systems/Loral-built
satellites is scheduled for launch in November 1999 with the launch of all
three satellites completed by January 2000.
"As a rule, satellite companies fall into two categories," says Moskowitz.
"For an early stage venture with no revenues and no satellites deployed, the
public markets are simply not available. As for the later-stage or mature
satellite companies like Loral or Panamsat, there is a market for these
companies. CD Radio is now past the financing hurdle. The time pressure is
clearly off, and they can focus on executing their business plan."
"Fall of '98 was a difficult environment for any satellite company to raise
money," says Musey.
Earlier in November, CD Radio Inc. announced that Prime 66 Partners L.P., a
Texas limited partnership, which includes Sid R. Bass of Fort Worth, TX,
completed its purchase of five million shares, or approximately 20 percent, of
CD Radio's common stock for $100 million. The Federal Trade Commission
immediately approved this transaction. A Texas-based attorney for Prime 66
indicates this investor group does not comment on its investments.
This partnership is involved in at least one other satellite project. On
September 14, 1998, Prime 66 made an initial 13G filing for 8.46 million shares
of Bermuda-based Globalstar Telecommunications Ltd. (GTL). To be eligible for a
13G filing, one has to be a passive investor and not involved in a potential
takeover. An attorney representing Prime 66 informed us of a Form 4 filing
completed in early November, which indicates that Prime 66 holds 11.7 percent
of GTL, or 9.63 million shares. George Soros holds a 4 percent stake in
Globalstar as well.
Other CD Radio shareholders include Loral, which obtained $25 million in CD
Radio stock in 1997 at $13 per share, or 1.92 million shares. This represents
approximately 8 percent of the 23.1 million shares of CD Radio. Loral also
holds a security interest in CD Radio's terrestrial repeater network.
"CD Radio has done a fantastic job of executing its business plan," says
Robert B. Kaimowitz, satellite communications analyst at ING Baring Furman Selz
in New York. "Here you can see what happens when a great strategy comes
together with a great management team."
"CD Radio is very attractive, and the two most attractive elements of their
business plan involve the size of the market and the quality of the team they
have assembled," says Apollo partner Andrew D. Africk. "That includes their
industry partners, Loral and Lucent Technologies which is building the chipsets
for their radios.
"Are we interested in other satellite deals? Yes," Africk adds. "We're a large
fund interested in quality business plans. We started this $3.5 billion fund,
our fourth, in 1998. Since we opened our doors in 1990, we have put $4 billion
to work. We try to segment as best we can, looking at the markets served and
who is serving those markets."
Loral: skybridge and cyberstar
New York-based Loral Space and Communications Ltd. is buzzing with activity
these days. In addition to a new financing campaign from Globalstar to fund its
revised launch schedule, other GEO and LEO projects, including the $4.2 billion
Alcatel-led Skybridge system with 80 LEO satellites, are moving ahead quickly.
Cyberstar, however, no longer involves the creation of a dedicated satellite
network.
"Cyberstar and Skybridge represent two different strategies, although both are
based on the emerging demand for broadband capability on demand," says Nick
Moren, Loral's senior vice president and treasurer. "Cyberstar can be funded
internally, and it is well within our capability to do so. If the demand
develops the way we hope, then we can develop the infrastructure. Skybridge
starts with the infrastructure and ultimately comes together with Cyberstar.
Interoperability is where we're heading."
While four Loral GEO satellites are scheduled for launch in the next seven
months, Moren indicates that Loral is always open to new satellite-based
opportunities.
"Acquisitions and Asian resources fall into that category," Moren says. "If
the appropriate opportunity arises in other parts of the world, and not just
Asia, we will remain open. Space assets are worth accumulating, and we have
resources in hand. The industry has grown tremendously, and yet we do not
expect to see the same pace over the next few years. We are improving Space
Systems/Loral's position and industry share. We've grown it from $400 million
to $1.4 billion in annual sales since we acquired Ford Aerospace."
Loral also has two DBS satellites in storage from the now defunct ABCN venture
in Asia.
The view from colorado
Colorado has emerged as a staging ground for all sorts of satellite
projects, large and small. Among other things, it is home to Echostar
Communications Corp., Primestar Inc. and Kastar Satellite Communications Corp.
The view from Colorado is upbeat, although Primestar, with more than two
million DTH subscribers, fell on hard times and now has been acquired by
DirecTV. This deal is still subject to approval.
Rick Westerman, Echostar's treasurer, already had his hands full when word
came in late November 1998 of a $1.1-billion stock deal with News Corp. and
MCI/Worldcom Corp., which resulted in Echostar taking control of the now
defunct ASkyB DBS frequencies at 110 W along with two ASkyB DBS satellites-now
designated as Echostar 5 and 6-and the former AskyB uplink facility in Gilbert,
AZ. According to Westerman, this deal will be subjected to a three-stage
approval process involving shareholders and government regulators, including
the FCC, due to the DBS license transfer.
Among other things, Westerman has just completed a major, $2 billion
refinancing of Echostar's entire capital structure. Echostar has more than 1.9
million DBS customers, and closed out 1999 with 100,000 new subscribers in each
of the last three months.
"We will likely be increasingly active in the acquisition market as our recent
acquisition of News Corp. and MCI/Worldcom's ASkyB assets suggest. The high
yield market has changed dramatically in November. It is open to repeat
issuers, including Echostar and other established companies that the market is
familiar with."
Westerman believes "the market is not quite there for less well- established
companies," as far as high yield and bank or institutional markets are
concerned. "We are launching data services by the second half of next year, he
says. "We have a working model of an advanced WebTV-type box here in our
offices. Our deals with OpenTV and EMNetwork are just the beginning, and they
look great. We will be rolling out a dual 110 -119 DBS service, which will be
available to Dish Network customers using a single 18-inch elliptical dish with
an additional LNB."
A replacement program for Echostar 3 and Echostar 4 has been revised
considerably. The acquisition of the two DBS satellites from News Corp. opens
the door to new and expanded programming opportunities involving the combined
DBS slots at 110 W and 119 W. Westerman indicates that insurance proceeds from
Echostar 4 can be added to Echostar's discretionary cash, although much of it
will cover an estimated $125 million in dish repointing costs. Plans for the
construction of Echostar's fifth DBS satellite have been scrapped, according to
Westerman.
"All the data suggests that Echostar 3 and 4 can probably operate for their
intended useful lives of 12 years," Westerman says.
A Positive Start To 1999
The satellite-related activity on Wall Street during the week of January 18
alone suggests that the market is much more willing to support the needs of
well-established companies, as Westerman and others suggest. This series of
positive or supportive indicators is a welcome change from 1998. The fact that
these transactions are preceeding in the absence of any news or updates from
Iridium may be a non-issue. However, the capital markets may be quite open to a
revised Iridium rollout with more conservative projections from Iridium.
Iridium had not released any subscriber numbers as this article was going to
press.
On January 19, just as Echostar's wholly owned subsidiary, Echostar DBS Corp.,
was moving its $2 billion debt offering as a private placement, Loral Space and
Communications announced its plans to sell $350 million of 9-1/2 percent senior
notes with the intent of using the proceeds to buy $150 million of Globalstar
Telecommunications Ltd.'s convertible preferred stock, among other things.
On the following day, Gilat Satellite Networks Ltd. announced that it had
filed with the U.S. Securities and Exchange Commission for a public offering of
4.745 million common shares. And, the week ended with Globalstar announcing
that it had entered into an agreement to sell $350 million of 8 percent
convertible preferred stock due 2011, while also noting the above-mentioned
stock purchase by Loral, which owns a 42 percent stake in Globalstar.
Add it all up and it looks like things are getting back on track fast in 1999
as far as satellite financing is concerned. Hopefully, we will see an even more
upbeat response from Wall Street in the coming months.
Peter J. Brown has been tracking the satellite and DTH sectors in the United
States and Canada as a freelance writer since the mid- 1980s. He lives on Mount
Desert Island, ME.
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