PanAmSat IPO Could Lift Spirits of Satellite Sector

PanAmSat -- which KKR, the Carlyle Group and Private Equity Partners bought this year for $4.3 billion -- filed preliminary SEC paperwork late Mon. for an IPO. Merrill Lynch & Co., Citigroup Inc. and Morgan Stanley will lead the underwriting for the company, whose biggest customers include Time Warner, News Corp. and Disney (CD Dec 21 p8).

PanAmSat estimates net proceeds from the offering, after underwriting discounts and other fees, will exceed $934 million. The owners intend to use about $345 million to repay some of the company’s outstanding debt, and $389 million for partial redemption of PanAmSat’s 9% senior notes and accrued interest. The company also wants to dole out a $200 million dividend to existing stockholders and issue new shares, all of which would dilute the stakes in PanAmSat held by its current owners, the filing states.

KKR, which said it typically holds an investment 5-7 years, offered to buy PanAmSat from DirecTV in April for $3.5 billion but slashed its price $200 million when a satellite failed before the buyout was finalized. In June, Carlyle and Providence each paid $953 million for 27% of the company, leaving KKR with 44%.

The IPO speaks volumes about the satellite industry climate, attorney Raul Rodriguez said. The announcement by PanAmSat’s private equity owners means market conditions have improved considerably on the heels of the industry’s recent slump, he said: “This provides a bright outlook for the coming year.” Several industry insiders said the IPO came as a surprise so soon after the buyout, but Rodriguez said no one should have expected the firms to hold on to the company long term.

Historically, the satellite industry has been run by “strategic owners,” a source said. For example, PanAmSat and Loral Skynet originated from satellite manufacturers, and Intelsat was started in part by govt. and telephone companies. “No one in this industry has ever been financially focused until 2004,” said attorney Phil Spector.

“This is part of a trend by the financial community to recognize that the 6 satellite service operators are important sources of cash flow,” Spector said: “They have many of the characteristics of electric utilities and other kinds of companies that pay a steady dividend, do not necessarily have dramatic growth, but have stable and strong earnings that can be forecasted well into the future.”

PanAmSat’s IPO is the latest play by private equity firms to offer companies publicly just months after an acquisition. TRW Automotive, Foundation Coal and water treatment business Nalco, all part-owned by Blackstone, are now listed on the U.S. stock market, the Financial Times reported. Blackstone also recently purchased New Skies Satellites for $956 million (CD Nov 3 p12) and Zeus Holdings -- a business backed by 4 private equity firms -- is buying Intelsat for $3 billion (CD Nov 3 p3).

Given the trend in going public, industry experts wonder what the financial future may hold for New Skies and Intelsat. “If you see one company going in that direction, you'll probably see more go in that direction,” analyst Tim Logue said: “These things are like tidal forces so we could anticipate seeing more of the same.”

An IPO may mean a smoother running company whose management would be “less constrained to deliver large amounts of cash” to investors, said analyst Roger Rusch of TelAstra. PanAmSat’s owners want to “milk the cow for all the cash they can and then get out,” he said, and an IPO targeted around the new year, when more money flows into the equity market, might be their best bet.