Robust market sparks satellite acquisitions

The U.S. military's huge demand for satellite services is driving a wave of acquisitions among large providers trying to capitalize on the growing federal market. Intelsat Ltd. last month bought Comsat General Corp. from Lockheed Martin Corp. for $90 million. In April, leveraged buyout firm Kohlberg Kravis Roberts & Co. acquired PanAmSat Corp. for $4.3 billion, while SES Americom Inc. purchased Verestar Inc. at a bankruptcy auction for $18.5 million. "Anybody that has a good military customer base has been very attractive," said Phil McAlister, director of Futron Corp., a telecommunications consulting and research firm in Bethesda, Md. "The large operators have realized that the U.S. government -- and the military in particular -- are one of the few near-term growth areas."Federal government spending on commercial satellite communications and imagery is expected to increase from an estimated $927 million in 2003 to $1.7 billion annually by 2008, according to a February report by Northern Sky Research LLC in Orlando, Fla. Military demand will drive most of the growth. The Pentagon's bandwidth needs have increased tenfold from the first Iraq war, the report said. Government applications of commercial satellites include carrying data from the military's unmanned aerial vehicles and from first responders, such as police and firefighters, when they are on the move. The Defense Department is the world's single largest buyer of commercial satellite services, said David Cavossa, acting executive director of the Washington-based Satellite Industries Association. Its demand for satellite services is so great that more than 86 percent of the military's satellite communications coming out of Iraq are going over commercial equipment, Cavossa said.SES Americom outbid SkyTerra Communications Inc. and Comtech Telecommunications Corp. in a 13-hour bankruptcy auction to win Verestar. "It's a very good potential combination of businesses, about half government and about half video and enterprise networks," said David Helfgott, president and chief executive officer of Americom Government Services Inc., a wholly owned, Princeton, N.J., subsidiary of SES Americom. "Verestar has done a good job of setting up teleports, networking them with a robust fiber infrastructure and managing a network services portfolio. And its growth market has been government."Conny Kullman, Intelsat's chief executive officer, said the company's purchase of Comsat General is "another step forward in our strategy to develop and grow our managed services capabilities in segments that we believe represent stable, long-term growth opportunities."Until its acquisition of Comsat General, Intelsat could only sell satellite capacity to its government customers. Now Intelsat can provide ground services, consulting services and hardware integration. The additional capabilities will allow Intelsat to bid on government contracts that it could not compete on previously, said Dianne VanBeber, vice president of investor relations for Intelsat.Analysts said the industry consolidation shouldn't increase the prices government agencies pay for satellite services. "There is still plenty of competition out there. It's not an issue of one company monopolizing the market," McAlister said.Consolidation among providers of satellite services to the government could continue. After Pembroke, Bermuda-based Intelsat last month postponed its initial public offering of stock, Kullman said the company decided to re-explore the possibility of selling the company or accepting an investment in it. Intelsat also reported that it hired New York investment-banking firms Morgan Stanley and Merrill Lynch & Co. Inc. to explore potential deals. PanAmSat also could be a future candidate for sale, industry analysts said, although officials of PanAmSat and KKR touted their deal as a move that would allow PanAmSat to develop new services and move into new markets."Our understanding is that they want to help us grow our business, and that's what we were looking for," said Tom Eaton, executive vice president of PanAmSat and president of G2 Satellite Solutions, the wholly owned government services subsidiary of PanAmSat. Twelve percent to 15 percent of PanAmSat's revenue comes from G2, Eaton said. Two years ago, PanAmSat wasn't a player in the federal market, but quickly became one with its 2003 acquisitions of Hughes Global Services and Esatel Communications Inc., Eaton said. But analysts said they don't expect New York-based KKR to hold onto Wilton, Conn.-based PanAmSat, which has 29 satellites around the world. Analysts said KKR could sell PanAmSat whole or break it into pieces."KKR doesn't care what business the company is in. They're financially driven," said Thomas Watts, managing director of telecommunications research at New York investment-banking firm SG Cowan & Co. LLC. "They see a potential upturn in the market that is not recognized in PanAmSat's current stock price." Staff Writer Gail Repsher Emery can be reached at gemery@postnewsweektech.com.