What's A Satellite Company Like You...By
Bruce L. Crockett and Charlie Lyons were having a ball answering reporters' questions by phone from COMSAT Corp.'s Bethesda (Md.) headquarters on May 25. COMSAT's CEO and president invited suggestions on what to rename the Quebec Nordiques, the National Hockey League team they had just bought for $75 million. They joked about the hoopla announcing a new name could provide.
But Wall Street wasn't exactly laughing. After all, five years of COMSAT's persistent attempts to diversify from satellite communications into various forms of the entertainment business have generated a stock price of around 19--about where it was in 1989. "The question," says Smith Barney Managing Director Charles W. Schelke, "is whether a telecommunications company should be undertaking this kind of diversification in the first place."
If you've never heard of COMSAT, that's because, until recently, it specialized in the prosaic business of delivering other people's data, voice, and video information via satellite. It was created as a publicly traded company by the government in 1963 to link U.S. phone companies to the global network of INTELSAT communications satellites. By 1989, it had grown into a $475 million operation, but that year, COMSAT execs began to see that fiber optics threatened the core business. They needed a hedge.
So, since 1989, COMSAT has used its hefty cash flow to imitate Ted Turner (table). It has bought the Denver Nuggets basketball team, a Hollywood film-production company, one-third of a Denver theme park, and On Command Video Corp., which beams pay-TV programs via satellite to nearly 600,000 hotel rooms. Now, Crockett is adding the Nordiques, which will move to Denver. And with partner Anschutz Corp., he's building a $132 million, 19,000-seat Denver arena to house the sports teams. PepsiCo Inc. will pony up some $70 million to post its name on the building.
With all the acquisitions, COMSAT's entertainment assets provided 19% of the company's $826.9 million in 1994 revenues. Problem is, investors who were used to steady satellite earnings worry about the fickle nature of sports and movies. COMSAT's entertainment assets posted a thin $11 million profit last year on revenues of $157 million. But in the first quarter, entertainment lost $3.2 million because of steep equipment amortization in its On Command business and costs at the studio, Beacon Communications Corp.
ON SALE? The loss dropped COMSAT's overall first-quarter profit to $14.6 million from last year's $20.2 million. Smith Barney Inc.'s Schelke estimates that 1995 earnings will sink to $133 million from $150 million in '94. So investors have been pushing COMSAT to spin off part of the entertainment unit to shareholders or find partners willing to invest. Crockett says he'd consider such options and vows to boost the stock price.
But he also sees promise in what he has. Entertainment is COMSAT's fastest-growing unit, and the company has done a fine job of turning around the Nuggets, which had only 2,500 season-ticket holders in 1990. Today, the team sells more than 13,000 season tickets, turning a small profit. The Nordiques offer a similar opportunity. Anemic attendance in tiny Quebec City had Nordiques officials projecting $28 million in losses over the next two years. Sports-crazy Denver, though it once rejected pro hockey, should be more supportive.
As for On Command, COMSAT has doubled the number of hotel rooms it services, to 590,000, according to researcher Paul Kagan Associates, ousting market leader Spectravision Inc. from chains such as Hilton Hotels Corp. And Crockett is stepping up TV and movie production. COMSAT and Liberty Media, a unit of Tele-Communications Inc., jointly own a TV studio in Denver to make local sports programs. COMSAT will boost production at Beacon, the maker of The Road to Wellville and The Commitments, to five movies annually.
All that takes money and patience, and Wall Street is notoriously short on the latter. "We intend to be the place where you can go out to see a movie, a ball game, or to play," says Beacon Chairman Armayan Bernstein. Sounds great. But investors prefer a place to go for steady earnings.
NUGGETS TO NORDIQUES
COMSAT's acquisition trail
1989 Bought a 63% stake in the Denver Nuggets basketball team for $18 million. Gained full control in 1992.
1991 Acquired a 47% stake--later increased to 74%--in
On Command Video, which delivers movies to hotel rooms.
1994 Merged with telecommunications-equipment maker
Radiation Systems for $150 million in stock.
1994 Paid $29 million for Beacon Communications, a film production company.
JANUARY, 1995 With Anschutz, committed to building a $132 million, 19,000-seat arena in Denver.
MAY, 1995 Purchased the Quebec Nordiques hockey team for $75 million.