News

Intelsat, PanAmSat to Merge

9/02/2005 8:00 PM Eastern

Privately held Intelsat Ltd. made a move to become the dominant player in the global satellite industry last week, unveiling a deal to acquire PanAmSat Holdings Corp. for $3.2 billion in cash.

Intelsat will pay about $25 per share for PanAmSat, a 25% premium to its Aug. 26 closing price and 40% above its March initial public offering price of $18 per share. Intelsat said it also would refinance or assume another $3.2 billion in PanAmSat debt.

News of the deal sent PanAmSat stock skyward — it was up $4 (20%) to $23.80 in 4 p.m. trading Aug. 29. The stock continued to rise at a slower pace in subsequent trading, closing at $23.86 on Aug. 30.

Satellite Powerhouse
Tale of the Tape for Intelsat-PanAmSat Merger:
Source: Individual companies
Intelsat PanAmSat Combined
Satellites 28 25 53
Revenue $1.04 billion $827 million $1.9 billion
Employees 800 600 N/A

SECURING TOP SPOT

The deal will secure the combined Intelsat-PanAmSat its position as the No. 1 satellite operator in the world, with 53 satellites, far outpacing SES Americom’s 18 operational satellites, which are primarily in North American orbit.

The combined Intelsat-PanAmSat will have about 20 satellites covering North America.

The deal still needs regulatory and shareholder approval, but is expected to close in six to 12 months. The new privately held company will have its administrative headquarters in Washington, D.C., and will be called Intelsat.

The deal comes about a year after DirecTV Group Inc. sold PanAmSat to a group of private-equity firms — Carlyle Group LLC, Providence Equity Partners Inc. and Kohlberg Kravis Roberts & Co. — for about $3.6 billion and the assumption of $750 million in debt. The three private-equity firms sold about 42% of PanAmSat to the public in March.

In announcing the deal, Intelsat CEO David McGlade — who will retain that position in the new company — said the combination will strengthen both players.

“Together, we will have a more comprehensive suite of video, voice and data products, including consumer broadband by satellite, HDTV, video-on-demand and IPTV. This will give our customers the ability to build regional and global networks with much greater efficiency,” McGlade said on a conference call with reporters. “PanAmSat has strong relationships with its video-centric customer base, including the leaders in cable TV programming.

“At Intelsat, we have been a pioneer in reaching a number of developed and emerging markets, through our network service providers, video partners and with governments throughout the world. Together the combined company can expand its reach while better serving existing customers.”

DATA AND VIDEO

Intelsat’s main strength is in data transmission — the U.S. government is one of its biggest customers — and in telecommunications. PanAmSat’s main strength is in video.

“Two-thirds of our revenue is in video, about half of that in the U.S.,” PanAmSat CEO Joseph Wright, who will become chairman of the new company after the deal closes, said on the conference call. “Most of Intelsat’s are in the area of telephony, data, broadband, the government and international. I would say they are very complementary. We really don’t have that much overlap.”

PanAmSat counts as its customers such major cable programmers as ESPN, Discovery Communications Inc., Home Box Office, A&E Network, Black Entertainment Television, Cable News Network, Fox Sports Net, Lifetime Television, MTV: Music Television, Starz Encore Group, TBS, The Golf Channel and USA Network.

Those companies aren’t likely to feel much impact from the merger. Intelsat had a minuscule video presence in the U.S., so the merger does not remove a competitor from the market.

The creation of a bigger satellite player, however, could be advantageous to larger programmers.

“Two strong global companies are good for the programmers because they can spread their costs over a bigger base,” said Andrew Setos, president of engineering for Fox Entertainment Group. “Large companies can afford and are able to be more innovative, so that’s a good thing.”

On the conference call, Wright said the merger will allow both companies to come to market with new services like IPTV much faster.

“Both of us have been separately working on IPTV,” Wright said. “This is going to be a growth area in the United States; it’s going to change to a large extent the ways that consumers get their video coverage when combined with other services [like] telephony and data. The two companies together are going to be able to bring these products and services to the market much faster and in a much more professional way.”

OTHER DEALS EYED

News of the deal came after reports last month that Intelsat was eyeing another smaller satellite company, New Skies Satellite Holdings Ltd. of the Netherlands.

Some analysts said that despite the size of the PanAmSat acquisition, the new Intelsat could possibly swallow other smaller companies to further the consolidation trend.

Wright, who in the past had downplayed the importance of big mergers — PanAmSat had focused on smaller deals, buying Alcatel’s Europe Star 1 bird and orbital slots for two more satellites for an estimated $65 million and forming a joint venture with Japanese satellite concern JSAT — said on the conference call that this deal and others are good for the industry.

COULD BE TOUGH SELL

But Citigroup cable and satellite analyst Jason Bazinet believes that despite management’s claim that they expect no major problems in obtaining regulatory approval of the deal, the merger will be a hard sell to regulators.

Bazinet focused mainly on the two companies’ government and network services business, where the new entity would become a dominant player and could trigger antitrust concerns. Bazinet wrote that the new company could sell off its network or government services units, but because those segments represent 35% of PanAmSat’s revenue and 70% of Intelsat’s revenue, “any divestiture might cause Intelsat to reconsider the offer.”

September