Avanti Screenmedia has completed the demerger of Avanti Communications, which will allow the satellite networks business to concentrate on building a successful business in the satellite arena.

Now that the demerger has taken place, it should also be easier for the operator to communicate the strength of its satellite business, said David Williams, CEO of Avanti Communications. “I believe the company’s assets and prospects are not fully valued at the moment because of our difficulties in properly communicate those elements to the market prior to demerger,” he said. “I think you will see a reversal there. I can now go out and explain a clean story. I can say that our market capitalization is 62 million pounds ($123.8 million) today, that is only slightly more than the cash equity value we have invested in our first satellite. I think when people are able to understand and analyze a straightforward satellite business, they will begin to see that value needs a fresh look.”

Avanti’s business plan stems around selling capacity on its Hylas satellite, which is scheduled to be into orbit in early 2009, and to kick off this new era, Avanti Communications announced a seven-year contract with Satweb for satellite capacity based on existing leased capacity, which will then transfer to Avanti’s Hylas satellite.

Williams believes the technology and power of the Hylas satellite will make it an attractive proposition for customers who want lower cost capacity. “We have 40 36-megahertz transponders equivalents for a capital cost of 118 million euros ($159.9 million),” he said. “That does make it cheap. The reason we are able to do that is that the technology that is on board on the satellite is able to extract very high power efficiencies. With Ka-band you can reuse frequencies very effectively and generate much more revenue generating capacity out of a fixed launch mass. The nature of the technology makes it very cost efficient for us. The Ka-band spot beam design means that if there is a customer who only wants a service in the U.K., they are not having to buy services on a transponder that covers the whole of Europe. So you are making much more efficient use of power and capacity resources for that individual customer.”

While the launch of the Hylas satellite is still two years away, Williams already is considering ordering a second satellite. “This is all about the success we have in pre- sales,” he said. ” I am certainly not interesting in making a large equity fundraising to buy a second satellite to go into the European position we have at 33.5 degrees West. Realistically, in order to finance the launch of a second satellite into that position, I would need to have half of Hylas pre-sold. If I have half of that capacity pre-sold, then the calculations are pretty straightforward. I have enough booked revenue to generate a return on the initial investment but also to support the debt financing on a second satellite.”

While Williams is optimistic that there will be strong demand for capacity on Hylas, he admits it may take time for these plans to come to fruition. “We have to bide our time a little,” he said. “We have been telling our shareholders not to expect spectacular things in the next couple of years. We have to make sure we manage the procurement process well and that we keep the satellite launch on time. That is the most important thing we have to do. We have to try and pre-sell the capacity to reassure shareholders about our prospects but equally we don’t want to give away our capacity at stupid prices. Our board has made that clear to me, but we will exploit our cost advantages to give customers good opportunities. In a years time, I would hope to have sold a few more transponders and that should result in increasing shareholders confidence in the prospects of the company.”

Williams would not comment on whether he thinks Avanti will be able to sell 50 percent of the capacity prior to launch, but the question of a second satellite seems to be more a matter of when, and not if. “Once we have sold around 20 transponders I think it is pretty likely we will order a second satellite for that position,” he said.

Target Markets Opening Up

Avanti is targeting deals in three markets: corporate networks, broadband and video distribution. The deal with Satweb is “significant” as it was the first deal the operator had done in the video distribution business.

Williams is optimistic that the video business can be a strong one for the operator. “It is apparent to me that there is not a huge amount of capital expenditure being made in the industry,” he said. “I think that is a function partly of the ownership and capitalization structure of some of the larger companies. In terms of DTH (direct to home), there is a fairly dramatic increase in the number of channels on existing DTH platforms. We are also seeing the emergence of brand new DTH platforms, particularly in Central and Eastern Europe, but even in Western Europe, there are signs that new satellite television services are being launched.”

Williams believes the potential of the DTH business in Europe has “been underestimated” and points to the number of high-definition channels in the United States as an example of the potential still available in Europe. “Our investigation says there are less than 70 HD channels in the whole of Europe,” he said. “We have a tiny number compared to the U.S. I think you will see that differential going away.”

With more HD channels coming on board and greater demands in the video space, Williams is confident that this will open up its other target markets. “The demand for satellite capacity arising from those increased requirements for DTH mean those customers that want capacity for wholesale purposesk, data communications, broadband communications networks are being crowded out of those positions that are being used for DTH,” he said. “They are experiencing very dramatic price rises. I have spoken to a lot of customers in the last couple of months who have got transponder leases that are due for renewal and they are experiencing very dramatic price increases. I spoke to one customer in Southern Europe who has a partial transponder lease and it is coming to the end of a three-year term and the renewal price is going up by 50 percent. Those types of customers are looking for lower cost capacity. So we have two core advantages. We have a cost advantage and a technology advantage.”

If Avanti can have a successful start and secure a number of European deals on Hylas, the company may then look to exploit other markets, Williams said. “There are opportunities in other regions that are similar to what we see in Europe. Maybe we will start to think about those next year. I think the obvious ones to look at are probably Africa and India. I am wary of making predictions that we will enter those markets,” he said.

Expansion beyond Europe also could be achieved in partnership with other operators. “We have talked to other satellite operators about collaboration,” Williams said. “If I can find very smart ways of financing new satellites in new orbital positions, we will consider that very seriously. We are not going to do something highly speculative, but if we see an opportunity to do a smart deal and to finance it in a creative way, we would certainly look at that.”

Mark Holmes