Lockheed Martin's Satellite Plan Is Part of New Growth Strategy
May 7, 1999
By JEFF COLE
Staff Reporter of THE WALL STREET JOURNAL
Lockheed Martin Corp.'s plans for a new satellite system are part of a
larger strategy to invigorate growth at the struggling defense giant, by
loading assets into a new telecommunications subsidiary that is expected to
be partially spun off, company executives said.
The new subsidiary, Lockheed Martin Global Telecommunications, and
two partners plan to develop the $3.6 billion Astrolink LLC project, a
venture to provide broadband services via four high-powered satellites by
2003. Lockheed Martin will put up $400 million in initial funding, while
TRW Inc. and a unit of Telecom Italia will inject $250 million each.
All the partners hope the venture will challenge U.S. and European rivals in
emerging global markets for multimedia and Internet transmission, as well
as corporate video and data networks.
But Lockheed Martin also has a greater goal that is certain to spark close
scrutiny from the aerospace giant's investors.
Ultimately, the unit, already loaded with $500 million in assets such as
transmission capacity evolving from various satellite projects and a
corporate Intranet, is expected to be partially spun off through an initial
public offering by 2001, according to John Montague, the subsidiary's
chief financial officer.
Controversial Bid for Comsat
The LMGT unit, which was formed last August, has attracted attention
mostly because of its controversial $2.7 billion bid for Comsat Corp.,
which will require an unusual string of government approvals if it is to close
by the end of the year.
John Sponyoe, LMGT's chief executive, says that regardless of whether
the Comsat merger is approved, other maneuvers to inject assets into the
new company should "unlock" Lockheed Martin's hidden value as a
commercial provider of space-and-terrestrial communications. "It's
absolutely the right thing to do," Mr. Sponyoe said recently.
That hidden value has been "trapped" inside various parts of Lockheed
Martin, including those that quietly operate secure-communications
services for the Pentagon, the National Reconnaissance Organization and
other government agencies, said Brian Dailey, the subsidiary's chief
operating officer.
Such executives are quick to note that stock in established
satellite-telecommunications providers trades at values two to six times
higher than shares in defense companies. Profit margins for successful
telecommunications companies typically are twice as high, in the same
comparison, the executives said.
Restrained Reaction
Some investors have initially reacted badly to Lockheed Martin's
telecommunications move, partly because the difficult Comsat purchase is
being proposed just as company profits are being sapped by problems
with making rockets, satellites and aircraft.
Lockheed's success in the new strategy "remains to be seen," said Lior
Bregman, an analyst at CIBC World Markets in New York. He said the
company has put up top talent, has considerable experience in certain
types of communications and is infusing varied and valued assets. "This is a
very lucrative potential business, but it is also very risky," Mr. Bregman
said.
Shares of Lockheed Martin closed at $44.375, up 25 cents, in New York
Stock Exchange composite trading Thursday.
Lockheed officials said the $500 million in assets already committed to the
new subsidiary include various satellite projects assured of gaining value
quickly, since the satellites and systems already are being completed. They
include three major projects planning first launches in the fourth quarter,
among them Lockheed Martin Intersputnik, a Russian joint venture serving
Asia and Africa; a Lockheed venture with GE Americom, a unit of General
Electric Co., to begin Asian service in the same quarter; and ACeS, a
mobile-phone venture to serve Southeast Asia, China and India.
Telecommunications Network
Also included among the assets is Lockheed Martin's vast internal
telecommunications network. The new unit will run that network under a
$200 million annual contract with the parent company, but excess and
expansion capacity can be sold to other companies.
Allowing for the spending already committed, Lockheed officials estimate
the value of those assets will rise to more than $2 billion by the end of
2002, exclusive of any value assigned to the Astrolink endeavor or to the
possible acquisition of Washington-based Comsat.
The first launch of a satellite by Astrolink is scheduled for 2002, followed
by three additional launches at six-month intervals. The satellites will
operate in the newly opening Ka-band of the spectrum. Like rival Hughes
Electronics, a unit of General Motors Corp., Lockheed Martin has
estimated that such satellites will each generate about $1 billion a year in
revenue.
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