Star attractions - satellite industry - Industry Trend or Event

Investment in satellite projects is looking healthier than ever--despite major setbacks in the global mobile services market. Instead of running for cover, investors are showing more market savvy in their assessment of individual deals.

The satellite industry is set to attract record new investment in 1999, despite the gloomy financial market sentiment that followed recent setbacks to mobile service operators.

The $5 billion raised by mid-August is higher than the $4.2 billion raised in 1998 for satellites from public debt and equity markets, according to statistics from investment bank Bear Stearns & Co.

"There is a high likelihood this will be a record year," says Scott Moskowitz, senior managing director at Bear Stearns in New York. "There clearly will be more capital raised, in particular for the DARS [digital audio radio satellite services] business. Hughes also registered with the U.S. Securities and Exchange Commission this spring its intention to tap the markets for as much as $2 billion."

The previous record year was $5.7 billion in 1997. Those figures do not include the substantial amounts of strategic partner capital that has flowed into satellite ventures in all of those years.

Observers say investors have learned their lessons and are now segmenting the market in an attempt to identify likely winners.

"The market is now distinguishing itself into multiple pieces and people are understanding that some deals are better than others," says Armand Musey, senior satellite analyst at Banc of America Securities in New York.

And Hoyt Davidson, managing director at Donaldson, Lufkin & Jenrette (DLJ) in New York, says he believes a $10 billion target for 1999 in new public money for satellites is still "do-able." He says: "The industry is still small enough where the amount of money raised in any year is not dependent upon the health of the market but upon the number and size of projects ready to come to market."

Davidson adds that media-related companies, such as "EchoStar and CD Radio are doing really well, while mobile telecoms satellite companies are still under a dark cloud" cast by Iridium. Iridium LLC, Washington DC, was the most high-profile satellite company to stumble, beset by manufacturing difficulties, dismal subscriber numbers and ongoing lawsuits by investors (CWI, 19 July, p.31).

Robert Landis, managing director, corporate finance, in the aerospace and satellite division of Deutsche Bank Alex.Brown in New York, says: "The banks are more focused on market risk for each different service," and are examining mobile satellite services (MSS) separately from broadcast media ventures and broadband or data. MSS companies are getting the worst reception, but companies associated with satellite data have been able to close on investments despite the rampant bad publicity created by Iridium for the satellite industry.

"Iridium has made the environment difficult but not impossible to raise funds," says John Coates, a satellite services analyst at Salomon Smith Barney in New York. "We are seeing large strategic investors take stakes: AOL has invested in Hughes [for a joint direct-to-home television-Internet venture]; Ford into CD Radio; and GM into XM Radio. Boeing has announced its intent to make a strategic investment in satellite services. Arianespace took an equity investment in Ellipso. Hughes is putting at least $100 million into ICO."

All of those strategic investments have come in the last four to five months as the Iridium problems unfolded, and point to a big vote of confidence in the market's potential.

And although bankers are likely to be less convinced by optimistic market-demand estimates attached to satellite business plans, a healthy list of commercial financing deals has been completed in the first half of the year. They include: $2 billion in bonds for U.S. direct broadcast satellite concern EchoStar Communications Corp. in January; $251 million in Iridium secondary stock shares; $350 million for Globalstar securities in January; $350 million for Loral Space & Communications Ltd. in the bond market; $270 million for Gilat Satellite Networks Ltd. in secondary stock shares; a $200-million bond placement for CD Radio Inc. in May; and a $75 million bond deal for Orbital Imaging Corp. in May.

But not everyone is succeeding in their financing plans. ICO Global Communications of London, which is building the third global mobile telephony satellite constellation to come to market, was unsuccessful this summer in raising $500 million though a rights offering to current shareholders to buy stock at $5 a share, compared to the $7 for which it is trading on the market. Not enough current shareholders signed up for the offer, and ICO was forced to seek money from strategic investors to meet September note payments.

ICO said in late July that it would seek approval for this plan to obtain $600 million in August to meet its obligations, but the company will need more than another $1 billion to carry it through to cash-flow breakeven some time after starting operations in fourth-quarter 2000. ICO will be back to the public markets for another try in early 2000.

ICO was adversely affected by the nervousness of the investment community over competitor Iridium's problems, compounded by the fact that ICO would be third only into the market. The old assumption that the MSS market would support three to four global players no longer holds, according to Banc of America's Musey, who says the jury is out on how many competitors will survive in MSS. Worse still for ICO was its lack of a big parent company behind it. "It might encourage a company to do something uneconomical like build a bigger constellation than needed, but when you get in trouble, there's nothing like a big parent to bail you out when you need it," Musey says.

The value of sponsorship by a big company was underscored by Globalstar LP, San Jose, California, and its backer Loral, which was expected to close on a $500 million credit facility, led by Banc of America, by 15 August. Loral was expected to back the deal, increasing its ownership in Globalstar from 42.6% to 47%-48%, according to Vijay Jayant, managing director, global satellite equity research at Bear Stearns.

With regard to new listings, the satellite industry has not floated a new public stock in a year, but that dry spell should end in the autumn when satellite radio venture XM Radio of Washington DC attempts to sell $150 million worth of stock. It registered for its IPO in July, marking the first satellite initial public offering since ICO went public last summer.

Wave of IPOs

Meanwhile, several IPOs are expected in the next year or two-in particular, a wave of offerings from newly privatized, former intergovernmental organizations such as Inmarsat, New Skies Satellite NV, Intelsat and Eutelsat. "If you have an existing system, generating cash, it's really an issue of how much more you can ramp up the business. For developmental companies. the skepticism is much higher. There are so many imponderables," says Deutsche Bank Alex.Brown's Landis.

Satellite broadband projects fall clearly into that developmental category, and are poised to tap the public markets in the next year or two. Several of those may be in a much better position to do so after drawing more private equity in the last two to three months. The Lockheed Martin Corp.-backed venture, Astrolink, with its other equity partners TRW Inc. and Telecom Italia, for example, has $900 million in commitment from the partners, which is 60% of the amount said to be needed to deploy the first three satellites.

Teledesic LLC, likewise, has raised about $500 million in equity commitments in the last few months, bringing its total funding raised to $1.5 billion of $10 billion or more required.

Different market

The investment bankers warn against drawing too many parallels between the troubled MSS sector and prospects for the broadband satellites. "It is a drastically different market," says DLJ's Davidson, who points to Internet growth and demand to move large amounts of data around the globe as evidence of the need for broadband satellites.

"There will be skepticism about broadband, but I'm not certain it's justified," says Landis. "People want to see how it's going to be built out, and the longer the broadband projects wait to announce their strategy, the more hesitant people are to invest."

Investors do not have concerns about the broadband satellite technology but they do see an issue with market risk. "Investors will look much harder at any numbers consultants have come up with on the possible market size," Landis adds. "Sampling statistics seem to work [for forecasting demand], but [whether they are deemed credible] will depend on the methodology. We want to know how the numbers were derived."

On the high-yield bond side, investors in satellite bonds have seen a decided turn for the worse in 1999, as the resale value of bonds continued to fall. On average, satellite bonds have declined far more steeply in value than the average for bonds in the overall market, or for telecoms bonds as a group, according to statistics from Bear Stearns as of early August.

Bond values

The Bear Stearns statistics say that investors who owned telecoms bonds experienced a total return of 20% in 1997, versus -0.2% in 1998, and 2.6% in the first half of 1999. Satellite bonds in comparison, returned 22.9% to investors in 1997, and dropped to -9.5% in 1998 and then to -26.1% in 1999. The decline in satellite bond values was driven in part by Iridium's troubles plus increased concerns over technical problems after a number of in-orbit failures of satellites owned by different operators around the world, Bear Stearns' Moskowitz says.

Meanwhile, Iridium executives faced an 11 August deadline for payments on an $800 million bank loan that had twice been extended to allow for the Iridium business plan to be rearranged. Iridium and its chief sponsor Motorola Inc. were apparently seeking a survival strategy in which partners and investors would sacrifice something to keep the project going long enough for the revised marketing ideas to begin bearing fruit. A cheaper service plan has been devised to try to drum up new subscribers and revenues.

           Overview of financing trends in the satellite sector

         ($ millions)
1993          $667
1994        $1,563
1995        $1,706
1996        $2,578
1997        $7,720
1998        $4,266
1999 YTD    $6,119


Private Equity
Public Equity
High-yield debt
Investment grade debt
Source: Bear Stearns

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