Northern Sky Research

Intelsat and Telesat IPOs on the Horizon

Oct 22nd, 2012 by Claude Rousseau   More from this Analyst | Profile

On May 18 this year, Intelsat Global Holdings, the world's largest operator of satellite services, filed with the Securities & Exchange Commission to raise up to $1.75  (€1.37) billion in an initial public offering (IPO) of its common stock. Specific date for the offering is still TBD.  Meanwhile, the request for an IPO from one of Telesat’s two major investors, the Public Sector Pension Investment Board (PSP), was filed and disclosed in the last month. What are the motives for these IPOs, and are they justifiable?

In the case of Intelsat, it clearly indicated that it will use some or most of the proceeds from the offering to repay its debt. The company reported a total debt of US$ 16 billion at the end of 2011, which is equivalent to a 7.7x Net Debt to Adjusted EBITDA level.  The company's revenues have been relatively flat, while capital expenditures have continued to increase. It is evident that paying down debt is becoming an increasingly hot issue; while, as detailed in NSR’s Satellite Operator Financial Analysis, 2nd Edition, Intelsat’s current execution of its growth strategy is not making this possible.

In the case of Telesat, it is PSP that is driving the IPO issue, with what seems to be the motivation that they simply want to cash out. The other major shareholder, Loral Space & Communications (Loral), is eager to maintain its holding. Potentially, the main reason for Loral to take this position could be related to a huge tax expense that might be incurred through a sale of its shares. It has been evident that Telesat has been prepared for a sale since PSP and Loral jointly acquired the operator in 2007. As outlined in NSR’s Satellite Operator Financial Analysis, 2nd Edition, Telesat demonstrated extraordinary performance, increasing its Adjusted EBITDA by about CAN$ 260 million to CAN$ 623 million in 2011, while improving its Adjusted EBITDA margin from 63% in 2007 to 77% today; and achieving a Net Debt to Adjusted EBITDA reduction from close to 7.7x in 2008 to 4.1x in 2011. Telesat’s future holding has been a particularly speculated topic since the company was up for sale a year ago. Failure to close the deal, or to have the two shareholders agree, eventually resulted in the large one-off dividend payment in May, to the shareholders and senior management, of a total of CAN$ 704.6 million financed through issuing new debt.

What is there to gain for the new investors? Ultimately, in both IPOs, the new investors will be buying debt. Is this an attractive investment? And in today’s volatile markets, is it good timing for an IPO?

The long-term and stable nature of two major satellite operators should generate strong interest, especially if they manage to grow their top-line. Thus, an IPO bringing lower debt and helping cash generation is likely to be perceived as a very stable investment with guaranteed dividends. Just look at SES and Eutelsat (Intelsat’s and Telesat’s closest peers), which are both public and whose stock has continued to perform well.

This investment-stability theme does justify to ask why PSP, as a pension fund with long term liabilities, wants to give up its Telesat investment so soon. Actually, Eutelsat’s major shareholder, Fonds stratégique d'investissement, is an affiliate of an organization created expressly to safeguard public funds, including the country's civil servants' pension funds and retirement accounts. They are clearly in it for the long haul.   

Bottom Line

The motivation for any investor in fixed satellite services should be and is the long-term stability and secure cash flows that the industry offers. Given this, the IPOs of Intelsat and Telesat are likely to be well received by the market and quickly achieve the equal status of their public peers, SES and Eutelsat. The question is whether their current investors have any better options at hand.

In the case of Intelsat, there is an urgent need to pay down its debt, in order for the satellite operator to move on to the next level of performance, and allow its investors to one day get a full return on investment. Although its debt level has not hampered its ability to invest in further growth, current high net interest costs have prevented the company from reporting a positive net profit for nearly a decade. It is time that this debt is paid down, substantially.

In the case of Telesat, the question to PSP is, “What’s the urgency? What is the better option to consider in today’s financial markets?” As a pension fund they should be expected to look long-term. So what is a better investment than the satellite operator with the largest (by far) Years of Backlog to Revenues in the industry? In its 2012 annual report, PSP stated that it typically holds its private equity investments for an average of five to ten years. On October 31, PSP will celebrate its five-year anniversary of its investment together with Loral in Telesat. Perhaps PSP is concerned with Telesat’s outlook and wants to sell now while the story is still good? Does Telesat’s impressive record of paying down its debt guarantee that they can do it again? Can the EBITDA margin improve further? Since Telesat’s current growth outlook is disadvantaged by the lack of expansion capacity, there must certainly be a plan to address this that creates further value?

Information for this article was extracted from NSR's report Satellite Operator Financial Analysis, 2nd Edition