Star attractions - satellite industry - Industry Trend or Event

CommunicationsWeek International, August 16, 1999 by Theresa Foley

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.