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A New Spin for the Satellite Biz

By Steve Rosenbush The global satellite industry is finally putting its Cold War-era history to rest. Until recently, the sector had been run by a collection of quasi-governmental agencies that served national and regional markets. Created during the '50s and '60s, this setup reflected a time when the global space race was as much about geopolitics as it was about business and technology.

That's finally changing. Private-equity firms have sunk billions into the satellite business, restructuring it along global lines that make more economic sense. The process took a big step forward on Aug. 29, when Intelsat announced it was buying PanAmSat (PA) for $3.2 billion in cash, uniting two of the biggest satellite operators in the world.

A group of private-equity companies, including Kohlberg, Kravis Roberts; Carlyle Group; and Providence Equity Partners, bought PanAmSat from News Corp. (NWS) last year for $2.6 billion. Intelsat was purchased this year by a group including Apax Partners, Apollo Management, MDP Global, and Permira Advisors.

PROFITABLE PLUNGE. Beaten down after the stock-market crash of 2000, many satellite companies have since restructured and are focused on improving their margins and operations. PanAmSat CEO Joe Wright, a former director of the U.S. Office of Management & Budget under President Reagan, has raised operating margins from 66% to 75% since he took over in 2001.

PanAmSat's buyout investors have made out well, earning $600 million since last year's deal. They raised millions earlier this year by selling 42% of PanAmSat to the public in an IPO that brought in $2.9 billion. Intelsat paid a 40% premium to the IPO price of $18 that was set just six months ago. That's a huge return at a time when the stock market is nearly flat.

The deal will create a global company with annual revenue of $1.9 billion and a broad portfolio of services. PanAmSat, which is focused mostly on the U.S. market, obtains two-thirds of its revenue from the sale of video-transport services to big companies such as Disney (DIS), Time Warner (TWX), and News Corp.'s Fox unit. Intelsat, which has a more global approach, gets most of its revenue from the sale of satellite-based voice and data services.

KNITTING TOGETHER. The deal alters the industry's structure. Only a few other big players will remain: Eutelsat, SES Global, and J Sat. These companies are expected to eventually acquire most of the roughly 30 local and regional outfits, which will have an increasingly tough time surviving on their own.

But the real competition for satellite companies isn't so much with each other as it is with the big telecom carriers that operate terrestrial fiber-optic networks that span the world's continents and oceans. The satellite sector's future lies in competing -- and cooperating -- with those big telecom players. "Now that the industry is stabilizing financially, we're going to see satellite and fiber operators coming together," says PanAmSat's Wright.

Does that mean satellite companies will merge with long-haul telecom networks? Not necessarily. Fiber bandwidth is so cheap that companies such as PanAmSat see no need to own it. But the two industries will work together more closely. Intelsat already has a commercial partnership with telecom operator Broadwing (BWNG). Together, they use a combination of satellites and fiber to direct video transmissions around the world.

BYE-BYE BOND. Of course, outright acquisitions could occur sometime in the future. "I don't see any need to own fiber right now, but that could change," says Wright, who will be chairman of the combined Intesat-PanAmSat.

A look at the new company's leadership may give the clearest clue about how borders in the satellite world are falling. It will be based in Bermuda, where Intelsat has its current headquarters. And it will be run by Intelsat CEO David McGlade, who's an outsider to the satellite industry but a veteran of telecom giant Sprint (FON) and wireless carrier O2 UK.

"We're going to push the envelope here," says McGlade of the new entity. And that means the James Bond Era of nationally defined satellite providers has run its course.

Rosenbush is a senior writer for BusinessWeek Online in New York

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