[Satellite News – 1-25-08] The acquisition of Telesat Canada by Loral Space and Communications, completed in October, instantly created the fourth largest fixed satellite services operator in the world. The company’s 12-satellite fleet is far smaller than its larger rivals but gives Telesat a strong North American presence, a stronger footprint in international markets and a global teleport and fiber infrastructure.
    “We have enhanced our competitive profile through our merger with Skynet and I believe that Telesat and Skynet,” Telesat president and CEO Dan Goldberg, said. “Even before combining we were competing effectively in their respective markets, but I do believe that the larger operators benefit from their greater scale, which is one of the reasons we’ve seen our industry consolidating. We’ll gain additional scale when we place into orbit the three satellites that we now have under construction, and we’ll continue to look for additional ways to sensibly grow our business.”
    Some industry observers have proposed a linkup between Telesat and Eutelsat, the third largest communications satellite operator.
    “Telesat and Eutelsat are complementary businesses that would fit together well, but I would say that Eutelsat has a lot of growth opportunities that they are pursuing,” he said. “I watch what they are doing with great interest, including their Ka-band activities and their S-band plans. They have a lot of opportunities they are focused on. We have a lot of opportunities that we are focused on. I would say while there are lots of good theoretical combinations that might exist out there, all of us are focused on the here and now and growing our businesses, and if there is value to be created for shareholders and we can all effectively serve our customers by considering some consolidation opportunities in the future, I’m sure everyone will be pragmatic about that going forward.”
    Goldberg spoke with Satellite News about the challenges facing Telesat as well as the future of the fixed satellite services sector.

Satellite News: Do you see Telesat becoming more of an international force as a result of this deal?

Goldberg: Now that we have created a global satellite platform by combining the Telesat and Skynet fleets, yes, Telesat will be a much more active player in the international arena. We believe demand will continue to grow strongly in many regions around the world and our existing and planned satellites are well positioned to capture that demand.

Satellite News: Would you still be in the market for further acquisitions?

Goldberg: There has been a trend towards consolidation over the past five-to-seven years. While there has been a lot of consolidation, it is not my expectation that it is going to stop with the passage of 2007. There are smaller operators out there. The industrial logic behind consolidation in our industry is very powerful. Operators do significantly benefit from economies of scale, and I do believe it is harder for the smaller satellite operators — operators with one or two, even three satellites — to compete effectively against the larger operators. We will be focused on the consolidation opportunities that remain out there. We are looking to participate in a fairly opportunistic way and certainly look to participate in a way that adds value to our shareholders.

Satellite News: How is integration proceeding?

Goldberg: It took us about ten-and-a-half months to get all the regulatory approvals that we needed and to close the deal. We had a significant amount of time to plan the integration between Skynet and Telesat. We had the opportunity to develop, what I think, is a very robust integration plan, which is exactly what we did. When the transaction closed at the end of October, we were able to hit the ground running.
    The good thing about the Telesat business and the Skynet business is that these are complementary businesses. People always say this when two companies merge, but it is more true in some instances than in others, and it is absolutely true with respect to our merger. Any informed observer in our industry can see how complementary these businesses are, and by that I mean how little overlap there is between the Telesat and Skynet fleets. Telesat’s emphasis has always been on North America, principally the U.S. and Canada and providing some services to Latin America as well. Skynet sold its North American assets to Intelsat back in March 2004 and the remaining fleet consists principally of four satellites serving international markets, including certain coverage of North America. Bringing the complementary Telesat and Skynet fleets together has allowed us to create a more diversified and global fleet.
    What that means from an integration perspective is that our focus was really bringing together our engineering and operations activities, so effectively moving those things up to Canada and integrating them into the operations that Telesat had, integrating more of the back office corporate activities, so things like finance, product development, and [human resources], but from a sales perspective, the two sales organizations were pretty much left intact. They are selling assets that are not overlapping.

Satellite News: Are you expecting significant cost savings?

Goldberg: On an annualized run rate basis, we are expecting to achieve ongoing synergies of $55 million a year. That is what our expectations are and I would say we are executing on our plan quickly. I have real confidence in our ability to achieve that objective.

Satellite News: What do you see as the major challenges for the company in 2008? What do you view as the major growth opportunities for the company over the next two years?

Goldberg: In terms of growth opportunities, our business has a really attractive growth profile going forward. Most of that is already locked in. 2008 relative to 2007 will see most of our significant growth coming from two new satellites. We launched our Anik-F3 satellite last year and it entered service last May. It contributed revenues, EBITDA (earnings before interest, taxes, depreciation and amortization) and cash flow for slightly more than half of 2007. We will have the benefit of a full year contribution this year, so we will achieve some growth there.
    Secondly, our expectation is that we are going to be launching our Nimiq 4 satellite sometime in mid-2008. That is a satellite that is 100 percent committed to our largest customer, Bell ExpressVu. We expect to achieve meaningful growth in revenue and EBITDA from Nimiq 4 this year and next. Beyond that, we will be looking to increase the utilization of both our North American and international assets. The international markets have experienced meaningful growth over the past two-to-three years. It looks like Central and Southern Asia, the Middle East and Africa are all markets that will continue to enjoy strong growth. Latin America also is a better market than it was a few years ago. We are hoping to capitalize on demand in all of these regions.
    Beyond 2008, we have two additional new satellites that will be driving growth: T11N and Nimiq 5. T11N, which will be launched at the end of this year, is a high-powered Ku-band satellite which will be serving mostly North America, Europe and Africa. We are expecting selling into that satellite will drive growth in 2009 and beyond. In mid-to-late 2009, we will launch our Nimiq 5 satellite, which is 100 percent leased to ExpressVu for [direct-to-home] services in Canada. The satellite is also capable of serving the United States. I expect those satellites to drive significant growth for us going forward, with the growth from Nimiq 5 already under contract.

Satellite News: What is the Ka-band opportunity for Telesat?

Goldberg: Telesat has been an industry pioneer in terms of Ka-band services. Our Anik-F2 satellite was the first commercial satellite making use of Ka-band frequencies for broadband two-way Internet services. WildBlue launched its services in the U.S. on Anik-F2. WildBlue has all the Ka-band capacity serving the U.S. Working with our local partners, we are providing the exact same service here in Canada, a Ka-band satellite payload coupled with a ViaSat supplied terrestrial network. We have seen strong subscriber growth in Canada and today there are approximately 40,000 Canadians homes and businesses using the service.
    The subscriber growth has been very strong in the U.S., principally driven by WildBlue, growth that has surpassed most people’s expectations. [Hughes Networks Systems] has launched their new service more recently. My expectation is that they will encounter good growth with their service as well.
    ViaSat made its ViaSat-1 satellite announcement at the start of this year, and we are an active participant in that opportunity as well. The ViaSat-1 satellite will go to our 115 degree orbital location above North America. ViaSat is going to have the capacity on that satellite serving the U.S., and Loral, which is one of our two principal shareholders, will own the payload serving Canada. Telesat has the exclusive rights to acquire from Loral the capacity serving Canada.
    We are actively participating in the broadband market today and, with the option to participate in ViaSat-1, we are well-positioned to build upon this business and our deep experience in this market going forward.

Satellite News: Will 2008 be the year when satellite broadband is considered a strong business for satellite operators?

Goldberg: I would say that this business is reaching critical mass, which was always the question around four years ago whether it would. It is always the question for any new service. You need to have a certain minimal level of adoption and support in order for it to really takeoff, because you need to get the volumes in terms of the production of terminals to drive down the costs of terminals, antennas, etc. You need to have a critical level of acceptance with users in the market in order to get broader adoption across the market.
    I would say that 2007 will be considered the breakout year for broadband via satellite with that business achieving critical mass. I think it is important for the industry to deliver the next generation of these services, and that is the great promise of the new ViaSat-1 announcement and what Eutelsat is seeking to achieve in Europe. I would say we all have a significant foundation to build upon in terms of the services introduced to date. There is clearly market acceptance and market demand for these services. Now the industry just needs to execute well going forward to build on the demand that is there and capitalize on that.

Satellite News: What are your capital expenditure plans beyond the three satellites under construction?

Goldberg: Although we are investing in additional satellites to support our customers and growth plans, we have a strong focus throughout the company on delevering. As part of the Skynet transaction, we took on a significant amount of debt. We largely completed our financing activities towards the end of last year. We do have plans to complete a bond offering early in the year to replace certain bridge financing that is now in place. In light of the debt on our balance sheet, there is going to be a very disciplined focus on cash flow generation and delevering. In this regard, we have no committed capital expenditure plans at present beyond the three satellites presently under construction.

Satellite News: What trends do you see emerging on the fixed satellite service landscape over the next two years?

Goldberg: There has been a significant amount of talk about HDTV (high-definition TV) and the impact that is going to have on the satellite busness. I think the talk is justified. We are seeing HD take-up driving demand for our capacity and services today. Nimiq 4 and Nimiq 5 are about the introduction of additional HD services here in North America. We are going to continue to see more and more HD services as the content producers and broadcasters convert their studios and production chains to be more HD compatible. Certainly the growth in HD receivers in the market has been impressive, so HD is one important trend that is driving demand for our industry. My expectation is that is going to continue over the course of the next few years.
    In addition, we expect we’ll continue to see growing demand from continued deregulation in certain parts of the world, strong demand in the natural resources exploration market given global demand for energy and minerals, greater penetration of satellite-delivered broadband services, and continued strong requirements from governments for commercial satellite capacity.