BC Capital Says Intelsat Should Keep Upgrading Its Satellite Fleet

PARIS —


T


he managing partner of the European investment firm that is purchasing 76 percent of Intelsat said the new owners are likely to stick with the investment for many years and have left room for new capital spending despite Intelsat’s enormous debt load.

Raymond Svider, managing partner of BC Partners, said the investment company has been looking closely at a satellite telecommunications investment since one aborted and one failed attempt to purchase satellite-fleet operator Eutelsat of Paris.

“We either did not have the stomach or the vision to simply acquire a minority participation” in Eutelsat following its privatization in 2001, Svider said. “Those that did, of course, made a nice amount of money.”

In 2006, BC Partners made a concerted attempt to purchase a 60 percent stake in Eutelsat, but the transaction collapsed when Eutelsat’s share price rose. “Certain shareholders changed their minds,” Svider said. “At the time we were disappointed,” Svider said in a June 21 interview.

BC Partners’




deal with




the quartet of private-equity firms that purchased Intelsat in 2004, values Intelsat’s equity at $5.03 billion, or about 10 times Intelsat’s 2006 EBITDA, or earnings before interest, taxes, depreciation and amortization.

“This is fully justified,” Svider said of the valuation. “This is a very predictable industry, with steady growth, a large backlog of contracted revenues, 75-80 percent EBITDA margins … and significant barriers to entry.”

Intelsat’s
current owners –




private-equity owners Apax, Apollo, Madison Dearborn and Permira –




will receive $4.6 billion in cash from BC Partners and also will retain the 24 percent of Intelsat that BC Partners is not buying.

Since its purchase by the investment funds, and since its 2006 purchase of rival PanAmSat, the Intelsat picture has been clouded by high debt. BC Partners’ entry will add another $3.85 billion to Intelsat’s debt, bringing it to $15.25 billion when the transaction closes in six to nine months.

Svider
did not seek to minimize the pressure on Intelsat’sbusiness imposed by its debt-service obligations.

“There is a lot of debt in the company –




undoubtedly,” Svider said. “But there is also a lot of cash flow. We have looked at this very carefully and are confident that the financial structure both fully accommodates existing [capital expenditure] plans and provides management with sufficient headroom to take advantage of further opportunities.”

Intelsat in March announced that it would increase its capital spending this year by 62 percent, to $615 million, to place new satellites over regions where demand is surging. Svider said BC Partners has no intention of cutting back that planned spending.

Unlike previous private-equity entries into satellite communications, industry observers questioned why BC Partners would be willing to pay so much for a company whose previous owners already have realized most of the gains from streamlining investment and operations.

Svider
said there was more to be done. For example, Intelsat has said it expects its PanAmSat purchase to permit the combined satellite fleets to save $92 million per year starting in 2008.

“We think Intelsat is an absolutely fabulous business,” Svider said. “The industry as a whole is much more attractive than it was three or four years ago. Of course, now you pay more, but the fundamentals are better. The significant excess capacity has been fundamentally purged by steady and healthy growth in demand.”

BC Partners is asking the current Intelsat management team, led by Chief Executive David McGlade, to stay on indefinitely. Svider said there will be no purge or any attempt to nudge aside current management.

But with the change in control of the company, top Intelsat executives will receive windfall paychecks that might




make it tempting to quit the company.

McGlade
said he will not be tempted.

“I’ve seen executives who get a whole lot of wealth go into a kind of retirement, but I am a bit of a workaholic,” McGlade said in a June 21 interview. “I have been in telecoms my entire life, and this is a special company. I love the diversity of our customer set. People work very, very hard here and even if they have equity that is vesting, I think there is a desire on the part of the senior team to stay.”

Svider
said BC Partners plans to sweeten the benefits packages of some Intelsat employees to assure that they have an incentive to stay with the company.

“Unquestionably, our strong desire is to keep the team in place,” Svider said. “It’s one of the best in the industry. After closing, they will keep some significant skin in the game, and we intend to put new incentives into place.”

Svider
said BC Partners also plans to stay with Intelsat. “We don’t view this as a short-term investment,” he said. “It’s never going to be one of incredibly fast growth. It’s an asset of high quality where value creation will take time to develop.”