Many of the satellite communications outfits that ended up in bankruptcy have reemerged and are drawing the interest of private equity
Some of the biggest names in tech have tried—and failed—to win at satellite communications. Remember Teledesic, a venture begun by wireless pioneer Craig McCaw and Microsoft (MSFT) co-founder Bill Gates aimed at constructing a constellation of hundreds of satellites that transmit high-speed Internet services? Or how about Iridium, or ICO Global Communications (ICOG), or Globalstar (GSAT)?
Those are among myriad efforts to use satellites to beam phone calls and broadband access that were ultimately scrapped or ended up in bankruptcy court, having lost billions of dollars. "Over the history of the industry, there have been a number of ventures that have been restructured and scratched," says Rich Power, an analyst at consulting firm Pike & Fischer.
Yet somehow, satellites are sexy again. Many of the companies that ended up in Chapter 11 have reemerged and are once again drawing investors' interest. In the past half-year, private equity firms including Harbinger Capital Partners and Silver Lake have poured billions of dollars into satellite companies. In February, BC Partners, Silver Lake, Intelsat management, and other investors acquired satellite broadband provider Intelsat for $17 billion. In March, the Gores Group and other private equity investors snapped up satellite services and networking provider Gilat Satellite Networks for $475 million.
Bigger Demand for Satellite Services?
In February, Harbinger teamed up with EchoStar (SATS) and others to pour $300 million into TerreStar (TSTR), which aims to provide mobile broadband services. Harbinger also agreed to provide TerreStar with additional airwaves and as much as $50 million in loans; in recent months, the investor has also been hiking its stake in Inmarsat (ISAT), which provides satellite broadband and voice services to ships and planes. And in January, the firm invested $150 million in MSV, which also plans to provide mobile broadband services.
Why the surge of interest in satellites? For starters, these companies are considered bargains. "These are incredibly distressed assets here," says Patrick Comack, an analyst at Zachary Investment Research. At 4.69, TerreStar's stock is trading 56% lower than a year ago, for instance.
Investors also see rising demand for satellite-based communications—not just calling and Internet access but TV services, too. As bandwidth-hogging high-definition channels proliferate, telecommunications companies that provide TV services will need more equipment to convey the signals, relying at least in part on satellites, says Raymond Svider, partner at BC Partners in London. Some corporate networks are also depending on satellite services for Web access. And at long last, satellite broadband may also be gaining traction in homes; about 1.25 million Americans will use satellite broadband in their homes and small businesses by 2011, up from 600,000 last year, according to Pike & Fischer.
Consolidation Could Be Coming
Low-priced assets will take on added allure if, as expected, the industry begins to consolidate. "Customers increasingly want to be served by larger operators, because scale can allow you to offer customers greater reliability and capacity," Svider says. Combining operations can also help reduce capital and operating costs while boosting operating margins.
Late last year, Inmarsat and MSV agreed to limited cooperation. TerreStar is thought to be in talks to combine with ICO. "If there are ways of cooperating with TerreStar, of course we are interested," says ICO CEO Tim Bryan. He declined to comment on whether the companies are in talks.
Harbinger may play a key role in stitching together assets capable of providing mobile satellite services. The company is actively looking for additional investors to finance plans by its satellite venture, BusinessWeek.com has learned. A Harbinger representative declined to comment. "There are too many suppliers at the moment who are light on the actual revenue," says Claude Rousseau, senior analyst with consultancy NSR. "I don't think there's room for all these operators."
No Guarantee of Success
Harbinger could build a mobile broadband alternative to the services offered by traditional wireless carriers. Satellites can offer customers faster download speeds, and satellite phones are now smaller and sleeker than in years past. "Historically, the satellite industry was targeted toward niche applications," says Chris Gates, vice-president of strategy at MSV. And its outsize phones "effectively prohibited the satellite industry from reaching the consumer market."
Another alternative for Harbinger is to simply resell satellite companies' airwave assets that have been purchased on the cheap (BusinessWeek, 4/24/08). At the Federal Communications Commission's recent wireless auction, various pieces of spectrum sold for several times more than the prices satellite companies paid when they acquired comparable spectrum in earlier sales.
Despite the growing interest in the sector, there's no guarantee satellite's new vanguard will be any more successful than its predecessors, especially as the economy veers toward recession. On Apr. 18, four TerreStar executives, including CEO Robert Brumley, resigned. Several days later, the company laid off 75 additional staffers. "We believe these cost reduction measures are a realistic and appropriate response to the current economic environment," TerreStar President Jeffrey Epstein said in a statement.
Many companies, including TerreStar, Intelsat, Globalstar, and MSV, are in the red. Some are hemorrhaging cash and require hundreds of millions of dollars in additional funding. Some have no customers. And would-be buyers of spectrum may not be forthcoming so soon after a government auction that left many carriers flush with airwaves. Notes Hoyt Davidson, CEO of Near Earth, which provides investment banking consulting to satellite companies: "The key now is for these companies to minimize their negative operating cash flows to survive until demand for their spectrum increases."