ETL.PA

Eutelsat‘s announcement that it signed a facilities agreement for a 1.9 billion euro ($2.4 billion) loan is "positive news," Sarah Simon, a media equity analyst at Morgan Stanley, said in a research note.

Simon believes the Fixed Satellite Services (FSS) sector remains attractive to investors and Eutelsat is Morgan Stanley’s "preferred pick" in the sector. "We believe that the FSS industry is one of the subsectors within media where we will see the greatest structural growth in the medium term. Capacity is being driven by new channel launches, growth in interactive services, the development of high-definition (HD) TV and increased demand for global government security and defense."

The proceeds from the agreement will be used to used to repay senior debt of 1.6 billion euros ($2 billion) held by Satbirds Finance Sarl, a Luxembourg-based intermediate holding company between Eutelsat Communications and Eutelsat SA, and to increase the financial flexibility of the Eutelsat Group. The loan is the first milestone in a plan, which will lead to direct ownership of Eutelsat SA by Eutelsat Communications by fiscal year 2007-2008.

"We now assume in our revised forecasts that Eutelsat can remove its 900 million euros ($1.1 billion) of non-tax deductible debt by" fiscal year 2007/2008, Simon said. "This is in line with management’s targeted time frame. The overall effect increases our EPS forecasts by 1.6 percent in 2007, 7.3 percent in 2008 and 5.5 percent in 2009."

The refinancing should lead to substantial interest savings for the operator, as well as lower tax charges. "We now assume that Eutelsat is able to remove the current tax inefficiencies relating to the 900 million euros ($1.1 billion) of non-tax deductible debt by July 1, 2007. This results in the debt becoming fully tax deductible, which obviously results in Eutelsat paying a lower tax charge from fiscal 2008. The effective tax rate lowers from 39.8 percent to 34.5 percent in 2008."

Simon also believes Eutelsat will sign new capacity agreement with Arabsat. "We expect Arabsat will need to extend its existing contract with Eutelsat for leased capacity following the failed launch of Arabsat 4A and delay of Arabsat 4B. We already factor in an additional seven million euros ($8.8 million) of revenues, assuming a six month extension to the existing contract which is currently scheduled to expire in July."

Simon also hails Eutelsat’s performance in certain areas. "Eutelsat has reduced its analog exposure to just 10 channels by the end of March 2006 over nine transponders. This is a reduction from 15 channels in June 2005 and compares favorably to SES Global’s 45 analogue transponders."

–Mark Holmes