by Owen D. Kurtin

Last time out, we started off looking at the series of upcoming initial public offerings (IPOs) by which last year’s private equity purchasers of Fixed Satellite Service (FSS) operators are planning to partly or wholly divest themselves of their holdings, far ahead of their traditional three- to five-year exit horizon, and well before the capital expenditure required both for existing fleet replacement and the need to invest in research and development, roll out new technologies, new services and perhaps purchase entrepreneurial service providers came due. Oddly or ironically enough, the planned IPOs of Intelsat and Inmarsat may satisfy the U.S. Orbit Act’s original requirement of dispersed public ownership. Last year, the Orbit Act was amended to allow dilution of ownership by means other than IPO in the face of Intelsat’s claim that its purchase by a private equity consortium should satisfy the Orbit Act.

IPOs both de-leverage and dilute, and private equity firms make leveraged acquisitions that leave their targets saddled with large debt burdens that must be serviced and ultimately retired, from the target’s on-going revenue streams. We learned last year that leveraged acquisitions of FSS operators could be done; we have not yet learned whether the resulting debt burden is manageable for such a capital-intensive business on a private ownership basis. The question now facing the private equity firms and their bankers is: can the public be made to want and buy what the private equity firms do not want to pay for?

In the starting gate as of our last writing were Panamsat Corp. and New Skies Satellites BV, with Intelsat and Inmarsat probably not far behind, and Eutelsat, which was the subject of a few private equity ownership sales late last year, bringing up the rear. As this column went to press on March 16, Panamsat closed its IPO and raised $900 million at $18 per share of the 50 million shares offered. The company had set a price range of $19-21 per share in early March.

Pricing an IPO is, of course, something of a black art, a combination of valuation techniques, aspirations, gauging by the book runners of what the market can bear and brinksmanship. Brinksmanship not least of all, because a sale price that falls below analysts’ predictions, or (worst of all) an offering that is undersubscribed, can spell disaster for the share price in the aftermarket. Naturally, issuer and underwriter want to set the price as high as the market will bear, but are wary of extreme aggressiveness, lest the issue be undersubscribed or have nowhere to go but down after trading begins.

In past times, an IPO that ran up in stock price in the days after trading began was considered a sign of erroneous pricing by the underwriter, an indication of money left on the table. The market would have bought at the higher, run up price. In the technology IPOs of the 1990s, post-trading run ups were expected and applauded, with the issuer content to leave money on the table in return for the prestige of growth in the aftermarket and the underwriter often aware that it had underpriced the issue to generate demand for the shares. In fact, the practice often generated resentment, less on the part of the issuer than by the venture capital firms that provided early stage financing, and which realized less on their investment exits than a higher going-out price would have brought.

In the meantime, markets must be made for the FSS IPOs. The FSS model generates steady revenue; blue chip institutional media sector clients for established services and relatively low growth. Interestingly, the return of the IPO market may favor this kind of offering, because unlike the IPO market of the late 1990s, the resurgent market is not as contemptuous of dividend-paying, as opposed to growth, plays, owing to more favorable tax treatment of dividends and the burn from the high growth issues that went bust last time around.

The Panamsat IPO and aftermarket should help answer the question of how much public appetite there is for the high earnings, steady revenue, but low growth FSS sector. If the appetite is not what the operators waiting in the wings hope, there should be new play in how can the operators’ stories, service offerings and business plans be repackaged, presented and altered to increase demand for their shares. These questions must be treated in the issuers’ registration statements.

Once the IPO has closed, the issuer’s life as a public company begins. The reporting requirements of the 1934 Securities Exchange Act, the listing requirements of the securities exchange or exchanges which trade its shares and the Sarbanes-Oxley Act of 2002 all place disclosure, reporting and capitalization burdens on the issuer that are hopefully worth it in terms of the market capitalization, liquidity, prestige and other benefits that are expected to accrue. Governance and other obligations under state corporation laws and judicial decisions interpreting them also change with public ownership.

Next issue: Closing the sale.

Owen D. Kurtin is a partner in the New York office of law firm Brown Raysman Millstein Felder & Steiner LLP and a member of the firm’s Technology, Media & Communications and Corporate Departments. He may be reached at +1.212.895.2000 or by e-mail at [email protected].