by Owen D. Kurtin

In the resurgent economy, the satellite sector has a chance to take off as never before, as investment capital that has stayed on the sidelines for three years moves back into play. The space industry must refinance itself from the expected capital influx, with higher-grade investment than the industry has historically accessed, for the sector to grow and compete. For too long, high-yield debt financings have dominated the satellite business, limiting liquidity and making capital inappropriately expensive compared to financing obtained by other businesses whose return on investment, EBITDA and other metrics are no better than, or inferior to, those of the space sector.

This state of affairs exists in large measure because the equity markets do not know the space sector, and what little they do know has been dominated by highly publicized business failures, such as the first generation of Mobile Satellite Service projects and launch and in-orbit failures.

At least three circumstances fuel investors’ lack of familiarity with the satellite business. First, several of the large operators were only recently privatized and are not yet public. Second, few operators are public companies, and the largest operator among them, SES Global, is not listed in the United States but in Frankfurt and Luxembourg. Third, other operators, such as Panamsat and Telesat, are partly, majority or wholly-owned by corporate parents. These factors combine in a public float that is small for the sector’s size and in infrequent equity capital raises. This combination tends to limit the availability of new capital for the space sector generally, and of high-grade investment capital specifically.

While Direct Broadcast Satellite and Digital Audio Radio Satellite have grabbed the headlines, those services remain dwarfed by the overall Fixed Satellite Service (FSS) sector. FSS remains a healthy sector despite limited access to the capital and liquidity provided by the public markets. Continued growth and competitiveness will require that to change, and fortunately, the ingredients for change and a great investment story to tell are at hand. The space business must ensure its share of high-grade investment capital by making sure that its story is told, and told well, to institutional and retail investors. This is the story to tell:

A Media and Communications Business is how the markets should see satellites, not as a technology business. That requires this industry, enamored with its technology and hardware, to reposition itself as a content distribution chain and service provider. Investors will invest in media and communications stocks; they may not in high-wire technology plays.

Revenue Base and Cash Flow are Strong and Secure because the FSS sector’s customers are high-grade media companies whose business absolutely depends on satellite feed. To imagine CNN or BBC correspondents reporting from Baghdad and Kabul without video feeds is to understand the lock-up of the FSS customer base. These customers must use satellite service and their ability to pay for it is unquestionable. Revenue streams are assured and margins are high, creating enviable cash flows.

Entry Barriers are high because Capital Expenditure requirements to build, license, insure and launch; technological requirements; orbital slot and radio frequency occupancy regulatory requirements; and a reluctance to invest with unproven operators tend to winnow out new and weaker entrants. This works to keep FSS in the hands of a relatively small number of major players and concentrates the capital and liquidity available to them.

Deregulation, Liberalization and Privatization increase competitiveness and attractiveness to investors. Privatized incumbents have been rousted from monopoly status in a variety of jurisdictions in belated response to the World Trade Organization (WTO) Basic Telecommunications Agreement. In the United States, the Federal Communications Commission’s (FCC) implementing the second Domestic Satellite Consolidation Order or DISCO II Order liberalized entry into the U.S. market for WTO member FSS and MSS operators. The FCC’s June 26, 2003 Satellite Licensing Reform Order consolidated and standardized much of the data on satellite applications and will hopefully lead to less Byzantine licensing procedures. These developments create a more competitive market and lower the regulatory barriers and costs of doing business for the operators that can "ante up" past the entry barriers.

A new investment cycle is starting. The satellite business must catch the wave of new capital. Just as critical, it cannot afford to hobble itself with unreasonably expensive funding. There is a story to tell here that should attract high-grade investment. This is a business that should not need to sell junk bonds.

Michael Flynn co-authored this article with Owen Kurtin. Flynn and Kurtin are partners in the New York office of law firm Sonnenschein Nath and Rosenthal LLP. They may be reached at +1.212.768.6700 or by e-mail at [email protected] and [email protected] , respectively.