A little more than year after completing its initial public offering, Eutelsat is undergoing significant ownership changes as the satellite operator’s private equity holders sell their stakes.

Spanish industrial group Abertis and France’s state-owned financial institution Caisse des Dépôts et Consignations will become the two largest shareholders in Eutelsat. Abertis completed its acquisition of a total of 32 percent of the Eutelsat from multiple private equity firms in January, while Caisse des Dépôts et Consignations has announced plans to buy a 26 percent stake in Eutelsat from Eurazeo.

While private equity firms have developed a reputation for squeezing all potential profits from companies, sometimes at the expense of their long-term health, Eutelsat CEO Giuliano Berretta praised the private equity firms for their stewardship of the third largest Fixed Satellite Services (FSS) operator in the world.

“We knew that one day the PE (private equity) firms would relinquish their investment, but for as long as they accompanied us they performed their duties well as investors,” he says. “ People sometimes say that when you have PE firms behind you, your scope for investment is reduced, however, our track record over the last four years contradicts this. Since 2001, we have carried out 10 satellite launches; opened sales offices in Europe, America and Asia; acquired a teleport in France and created our Skylogic subsidiary, which I believe is now one of the world’s leading IP (Internet protocol) satellite platforms and certainly the leading platform in Europe.
 
“I believe that this company is so attractive that even cautious financial investors in their role as shareholders understood the importance of adding capacity for our business,” he says. “They accepted that a capital expenditure holiday is not the way to secure the future. I don’t think private equity firms have been negative for Eutelsat.”

Berretta discussed the impact the recent ownership changes might have on Eutelsat and assesses the satellite industry going into 2007 with Via Satellite Associate Editor Mark Holmes.

Via Satellite: What impact will the new ownership have on Eutelsat?

Berretta:  I am extremely positive about the arrival of the Caisse des Dépôts, which brings stability to our shareholder base, and Abertis, who has a strong international reputation and a dynamic vision about the development of international infrastructure. We are very confident that we can find strong synergies working together.”

Via Satellite: Do you expect more FSS consolidation in 2007?

Berretta: Consolidation among the bigger FSS players is clearly already behind us, with the Telesat and Loral agreement being possibly the last merger of scale. However, I believe that a lot of small operators are ripe for consolidation and that acquisitions by bigger players will continue in 2007.

Via Satellite: Will Eutelsat be a player in this phase of consolidation?

Berretta: We do look at possible acquisitions of relevance to our business and will review strategies with our new shareholders. I am confident that with new partners that we cannot only consider organic growth but also something more. I see opportunities for further expansion, which includes having a stronger relationship with Hispasat and also looking at other routes to further growth.

Via Satellite: With Abertis now the largest shareholder, is it more likely that Eutelsat would be able to make a move for Hispasat?

Berretta: We have a very good understanding of the Spanish market. A number of key people already in Eutelsat are Spanish, and I am enthusiastic about more integration with Hispasat. However, as we are at the beginning of a new story with Abertis, it is too soon to make any affirmations on our future relationship with Hispasat.
Via Satellite: Do you see any synergies between Eutelsat and the new Telesat?
Berretta: We know Dan Goldberg well from his time at New Skies and have a longstanding frequency cooperation agreement with Loral through which we commercialize four transponders on the Telstar 12 satellite at 15° West. In terms of cooperation, this new combined entity is very young, and I think we all have to see what directions they will take.

Via Satellite: Can we expect Eutelsat to become more of a global competitor?

Berretta: We are certainly following the route of geographic expansion organically and through Hispasat, whose Amazonas-1 satellite has good coverage of North and South America. We consider this to be the best route and it has proven profitable for Eutelsat.
We have concentrated our efforts on a dual track of building strong premium neighborhoods serving profitable markets that are the least exposed to price pressure and maximizing revenue on satellites at other locations through value-added video and broadband services. This dual track results today in an average annual transponder price of 2.2 million euros ($2.9 million) across our fleet.

We are firmly committed to developing activities in what we call our Two Continents: European Union countries and our second continent, which embraces Russia, Turkey, the Middle East and Africa. The second continent is a big region, breaking down naturally into economic zones which we address through the different satellite neighborhoods we have built up across our fleet and which we will continue to boost with new capacity. For example, growing markets in Africa, Russia and the Ukraine are served from 36° East where we currently have our cluster of two satellites — W4 and Sesat 1 — and where we will put the powerful W7 satellite after its launch in 2009. We also see a continuous growth of capacity in Turkey, which we address through W3A, and in North Africa, which is part of our core coverage and where we recently optimized coverage for clients using the Atlantic Bird 4 satellite.

Via Satellite: What is the significance of your S-band joint venture with SES Global?

Berretta: There is some risk, and it is for this reason that we have selected to share the investment of 130 million euros ($169 million) with SES, but I do not believe that there is a great deal of risk. We believe it makes sense to work together, as there is no business logic in developing a satellite with access to only small amounts of bandwidth. To make a service that makes sense, you need a quantity of bandwidth.

The potential for this payload to be used for other services than video to mobiles also substantially mitigates the risk. We believe that applications such as civil security, updating of GPS information and ancillary services to the Galileo system could all be channelled through this type of payload. We are also convinced that the characteristics that are key to the success of XM Radio or Sirius in North America don’t apply in Europe, which has a fragmented linguistic market, strong FM radio and less long-distance road travel. We therefore believe that the S-band payload on W2A could also host radio services but to a more limited vehicle market than in North America.

Via Satellite: What role can satellite play as the demand for mobile video, TV and data services becomes greater?

Berretta: From where we are today, it is quite understandable that video to mobiles using the S-band as a complement to 3G bandwidth makes economic sense. We expect in three years time that there will be a lack of  bandwidth in UHF and that a satellite system will be provide valuable new capacity for direct reception in rural areas via handsets provided by terminal manufacturers such as Samsung and for feeding terrestrial transmitters in urban environments. The scenario of equipping handsets for DVB-H and DVB-SH reception is not so different to what has already been experienced in GSMs, which transitioned into triband handsets from monoband first-generation handsets.

Via Satellite: Has the demand for high-definition TV (HDTV) exceeded your expectations, and with no huge sporting event in 2007 to drive demand, how do you expect HD to progress this year?

Berretta: We are firm believers in HDTV but have always been relatively prudent about the speed of takeup. I cannot say HD exceeded our expectations in 2006, but I would say it definitely met our expectations. At the end of 2006 there were already 17 HD channels from Western and Eastern Europe broadcasting through our satellites. Paying subscribers to HD channels across Europe numbered a few hundred thousand by the end of 2006.

There are three elements that need to come together for HD to achieve its potential. First, there is still a big effort required in Europe to educate consumers on HD-ready and full-HD displays and to reassure them on the standards debate on HD DVDs, which looks similar to the VHS/Betamax battle in the early 1980s. Second, broadcasters need to grow and market their content. And third, the set-top boxes have to be available and aggressively priced. Once these elements have fully come together I think the HDTV market will be ignited. In 2006, the World Cup was a great platform for compelling HD content but there were not enough decoders to ignite the market. We are confident HD has a bright future and forecast that up to 12 transponders across our fleet will be broadcasting HD channels by June 2009.

Via Satellite: Will IPTV expansion hurt the satellite broadcasting business?

Berretta: I am very confident in the future of satellite broadcasting and in pay-TV via satellite. Just look at this statistic to show the cost efficiency of satellites from the client perspective: For a platform of 4 million subscribers, broadcasting channels from a premium video neighbourhood in DVB/MPEG-2, which is not the most advanced standard, the cost per subscriber per channel per month is less than a cent of a dollar. With MPEG-4 compression, the costs are by definition even lower. I think this is a pretty compelling figure in comparison to many other delivery platforms. As far as IPTV is concerned, the competition in Europe is playing out with cable operators in urban areas. IPTV is growing, with France representing Europe’s biggest market, but it is only expected to penetrate 8 percent of digital homes in Western Europe by 2010.

While IPTV brings the benefits of interactivity, there are issues on variable quality, patchy coverage and bandwidth limitations. It is inevitable there will be differences in quality of an IPTV service as the bitrate is not constant. TV services are not tolerant of a signal that will give you a variable bitrate depending on number of users. If other users use the same group of lines, the bitrate goes down. There is an even greater challenge for HD.

In an interactive environment, the business logic that we see and that broadcasters are understanding is to combine terrestrial and satellite technologies by using satellites for the forward link and the Internet for the return link. This enables them to leverage the unbeatable cost efficiency and bandwidth availability of satellite for content distribution.

Via Satellite: What are your capital expenditure plans?

Berretta: Our capital expenditure was recently raised from 770 million euros ($1 billion) to 980 million euros ($1.3 billion) for the next three years in order to accommodate Hot Bird 10 and the investment in the S-band payload on W2A. This is a solid plan of expansion which will fuel our future growth. We now have five satellites in construction, which will enable us from 2008 to bring fresh capacity to premium neighborhoods and to cascade existing in-orbit capacity to new locations. … This means that we launch new satellites to our established orbital locations to replace existing satellites, which are released to new positions. The launches in 2006 of Hot Bird 7A enabled us to release Hot Bird 4 (now called Atlantic Bird 4) to 7° West where it is co-positioned with the Nilesat satellites. The launch four months later of Hot Bird 8 released Hot Bird 3 (now Eurobird 10) to 9/10° East where it can broadcast content to homes equipped for dual-feed reception with the Hot Bird neighbourhood. We plan to continue this strategy of cascading satellites with future launches.

Via Satellite:  How do you expect the satellite landscape to change throughout the next 12 months?

Berretta: I believe the next year will be a year of assimilation for the big acquisitions, organic growth for the rest, with some potential for consolidation among smaller operators. I think it will be a good year for satellite with continued recovery of the FSS sector in depressed regions and a win-win situation for operators and users elsewhere. There is still competition in areas such as the Far East and North America, but since Eutelsat is not a dominant player in either region we do not feel exposed to downward pressure on prices.

In terms of growth, there will be opportunities in new value-added applications and services particularly for broadband services in the transport arena on trains, in-flight, and maritime markets. This will enable us to pursue our strategy of maximizing revenue per transponder in parallel to attracting new services to our premium neighborhoods and cascading capacity out to our emerging premium positions.