PanAmSat $4.3B Sale Aids DirecTV

4/25/2004 8:00 PM Eastern

Less than six months after buying a controlling interest in direct-broadcast satellite service provider DirecTV Inc., News Corp. engineered a deal to unload satellite manufacturer PanAmSat Corp. to leveraged buyout giant Kohlberg Kravis Roberts & Co. for $4.3 billion in cash and assumed debt.

The deal, expected to close in the second half of the year, will pump some needed cash into DirecTV, which is on the verge of a major push to grow its subscriber base and offer high-speed Internet services via satellite to compete with cable operators.

News Corp. inherited an 80.5% interest in PanAmSat when it closed its $6.6 billion deal to buy a 34% stake in DirecTV parent Hughes Electronics Corp. in December. At the time, DirecTV said it was investigating its options for PanAmSat.


News Corp. initiated the auction process for PanAmSat in February, and several interested parties, including European satellite power Eutelsat, Luxembourg-based SES Global SA and Netherlands-based New Skies Satellites NV, expressed at least some interest in the assets.

In the past several weeks that list was pared to KKR, a group consisting of private-equity firms the Blackstone Group LP, Carlyle Group LLC and Providence Equity Partners Inc.; and a group made up of Thomas H. Lee Partners LP, Bain Capital LLC and the Quadrangle Group.

PanAmSat owns and operates about 24 satellites, about half of which beam broadcast and cable networks to MSOs in the United States.

PanAmSat has had strong financial results — revenue was up 2.3% to $831 million and earnings increased 15.8% to $99.5 million (66 cents per share) in 2003 — but its business didn’t fit with News Corp., which prefers to lease satellite space rather than own it.

In the end, KKR won out by agreeing to part with the most cash. According to the deal, KKR will pay $23.50 in cash for each PanAmSat share (about $3.55 billion) and assume $750 million in debt.


DirecTV’s cut of the deal will be about $2.8 billion, cash that is expected to help the No. 1 DBS service provider move forward with aggressive expansion plans.

DirecTV chairman Chase Carey — a former News Corp. executive — has said in the past that his goal is to boost subscribers by 25% to 15 million by 2006. DirecTV currently has about 12 million subscribers.

DirecTV vice chairman Eddy Hartenstein said that the DBS giant hasn’t yet determined what it will do with the cash, but said it is fair to assume that at least part of the money will be used to fund expansion.

“Our focus is becoming more and more singular on the DirecTV business,” Hartenstein said. “We will look at what the best uses are to ensure the continued success of the DirecTV U.S. business.”

Investors didn’t appear happy with the sale. PanAmSat shares were down $1.49 each to $23.30 per share on April 20. PanAmSat stock has been on a tear for the past few months in anticipation of a sale, so the $23.50 per share valuation appears low. But Hartenstein said that is not the case.

“We believe $23.50 is a fair price,” Hartenstein said, pointing to the appreciation of PanAmSat stock in the past few months as speculation of a sale mounted. “KKR came to us with a very clean all-cash deal with a minimal risk to achieving regulatory approval.”

Since Feb. 2, PanAmSat stock has risen from $20.62 per share to as high as $25.76 on April 14, a 25% ($5.14 per share) increase.

Most analysts expect DirecTV to use the money to either buy out News Corp.’s Latin American satellite assets and combine them with its own, build more satellites (which normally cost about $250 million each) or to subsidize the purchase of customer premises equipment like set-top boxes and digital video recorders.

Although the PanAmSat sale has been anticipated, Oppenheimer & Co. cable and satellite analyst Tom Eagan said that cable operators should be worried.

“They [DirecTV] really don’t have that much debt,” Eagan said. “They can use some of the cash to subsidize upgrading their set-top boxes. One of the biggest issues DirecTV has is churn. If they cut churn out, that could mean less people going back to cable.”

DirecTV churned about 1.8 million customers in 2003, a normal level for the company. But with the added cash, DirecTV could heavily subsidize rolling out set-tops with built-in DVRs or HD capability, which could keep those customers on the rolls longer.

The PanAmSat deal leaves News Corp. with one more Hughes asset to shed: Hughes Network Systems. According to published reports, HNS could attract as much as $1.5 billion.

Hartenstein said that DirecTV is currently evaluating its options concerning HNS, but that no deals are in the works.

Consolidating the Latin American assets is also under consideration, he added.

“That’s clearly something we’re looking at. We both have partners and there are certain regulatory bodies we would need to concern ourselves with and satisfy in any kind of consolidation,” Hartenstein said.

HNS is made up of three businesses — a set-top box manufacturer, a VSAT operation that beams data for businesses, and the Spaceway high-speed Internet operation. Most analysts believe that HNS could be sold to different buyers.

Eagan said the set-top side of the business could sell for between $500 million and $1 billion (one to two times estimated 2004 revenue), probably to one of DirecTV’s other set-top suppliers, like Philips Electronics N.V., Samsung Electronics Co. or RCA Corp.

The data business — which uses VSATs at retail chains to beam credit card authorization and ATM data — could be sold to the other player in the industry, ViaSat Inc. And Spaceway could go to another satellite service provider.

“I just don’t think they need to be in the [Spaceway] business anymore,” Eagan said. “They’ve already said they’re not going to use Spaceway to augment their satellites for HD local channels. Therefore it has less and less use to the business of DirecTV.”


SES Americom CEO Dean Olmstead, who has expressed interest in some of PanAmSat’s assets, said in an interview that the introduction of a new player into the satellite industry will have little effect.

“In terms of the marketplace, the activities out there, there won’t be very much [impacted],” Olmstead said. “The real question is what does it mean to have all of the other satellite companies owned by private-equity companies.”

Eutelsat, IntelSat and InmarSat, the three largest satellite players, all have some private-equity ownership. Texas Pacific Partners and Spectrum Equity Associates own an 11% stake in Eutelsat; Apax Partners has a significant investment in Inmarsat and Tata Sons Ltd., a consortium based in India with holdings ranging from steel to software, owns a 5% stake in Intelsat.

Olmstead added that while private-equity companies are known “to be good, responsible owners, they tend not to be long-term shareholders.”

Already speculation is that KKR will sell off some of PanAmSat’s less strategic satellites. Olmstead pointed out that PanAmSat is going to have to spend a lot of money in the next few years for replacement spacecraft — in 2003, two of its existing satellites have experienced anomalies that will reduce their useful life — money which KKR may not be willing to part with.

PanAmSat’s North American Fleet
Satellite Launch date Estimated End of useful life Geographic coverage
Source: PanAmSat 10-K
Galaxy02/942005North America
Galaxy 3C06/022017North America; Latin America; Caribbean
Galaxy 3R12/952004North America
Galaxy 4R04/002007North America
Galaxy 503/922004North America
Galaxy 906/962008North America
Galaxy 10R01/002015North America
Galaxy 1112/992015North America; Brazil
Galaxy 124/032018North America
Galaxy 139/032018North America
SBS 610/902007Continental U.S.
HGS-508/842005Continental U.S.
PAS-1R11/002016Americas; Caribbean
PAS-3R01/962009Americas; Caribbean

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