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PanAmSat: Getting Back to Growth

By Steve Rosenbush It's been a while since anyone wanted to own PanAmSat (PA). The company's former owner, General Motors (GM) decided to sell the business after the tech bust. Falling prices and overcapacity made it unpalatable.

News Corp. (NWS) bought PanAmSat along with the rest of GM's Hughes satellite business. But while News kept the DirecTV unit, it had little use for PanAmSat, which sells satellite service to big customers, such as government agencies, cable-TV outfits, and media companies.

TRIMMED COSTS. Now PanAmSat finally is hitting its stride. A group of private equity players -- including Kohlberg, Kravis Roberts, Providence Equity Partners, and the Carlyle Group -- bought the company from News Corp. last summer for $2.6 billion. The new owners raised $900 million in an IPO earlier this year. While the IPO diluted their ownership from 100% to 58%, they haven't sold any shares in the company, a sign that they believe in its prospects.

After years of cost-cutting and turmoil, PanAmSat is returning to growth. CEO Joe Wright, who was director of the Federal Office of Management & Budget under President Reagan, has reduced operating expenses by 40% and raised operating profit margins 66% to 75% since taking over in 2001.

The key to Wright's growth strategy is small acquisitions, such as the deal with Alcatel (ALA) announced on July 19. The telecom giant sold its Europe Star 1 and slots for two more satellites to PanAmSat. Financial details weren't announced, but analysts said the deal was valued at about $65 million.

BARGAIN BIRD. It's cheaper to buy than build, according to Wright. The midsize satellite would have cost nearly $150 million to build, launch, and insure for the critical first year of operations. For less than half the cost, PanAmSat bought a satellite that should have at least a decade of service left.

That satellite will expand PanAmSat's business in growth regions such as Europe and the Middle East. Wright sees the deal boostings earnings by about 9 cents a share, starting immediately. Shares of PanAmSat rose 9 cents on July 19, to close at $20.33.

More acquisitions are likely in the satellite sector, Wright says. Four big outfits -- Intelsat, Eutelsat, SES Global, and PanAmSat -- account for two thirds of industry revenue. The remainder of the revenue is generated by more than 30 smaller companies, all of which have one problem or another. Their average capacity utilization is less than 50%, vs. what PanAmSat says is its utilization rate of 75%. It wants to boost that rate to 90% over the next four years.

GLOBAL PERSPECTIVE. Wright hopes to achieve that goal by acquiring smaller companies and lines of business. PanAmSat can boost its utilization rate because it has more customers than the companies it plans to buy. It also can eliminate the operating costs for the newly acquired units, which will share costs with PanAmSat's other satellites.

PanAmSat wants to continue boosting its presence in Europe, Asia, Africa, and the Middle East. Data services, especially for the government, will be a source of growth, too.

Wright sees the potential for growth in the U.S., because TV companies will need more capacity for high-definition programming. In fact, PanAmSat launched a joint venture in the U.S. last month with Japan's JSAT to help capture the high-definition market.

CALMER ENVIRONMENT. The market for satellite services is a lot better than it was a few years ago. Long-promised services like broadband and high-definition TV finally are taking off. At the same time, the industry is eliminating overcapacity, which should help create a stable price environment.

The sector always will face challenges such as technical failures and debt, which are inherent in a high-tech business with huge capital costs. But PanAmSat shows that the satellite business, which took a brutal hit in the tech bust, can sustain growth. Rosenbush is a senior writer for BusinessWeek, based in New York

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