NEW YORK-“The best news I will present today is that, for the first time in more than a year, there is significant interest by institutional investors” in private equity investments in satellite companies, said Hoyt Davidson, managing director of Donaldson, Lufkin & Jenrette Securities Corp.
“There also is continued interest by strategic investors willing to take early-in risk, and that tells me this industry will survive,” Davidson said at the recent “Space and Satellite Finance Conference,” sponsored by the Institute for International Research, New York.
Nevertheless, the sector must overcome the bad impression left by recent history, said John Bensche, senior vice president of satellite services, Lehman Brothers Inc.
Iridium L.L.C. has received extensions to its covenant deadlines-three times-to avoid defaulting on its loans. Orbcomm Global L.P. has had a slower ramp-up than expected. There have been three rocket failures. ICO Global Communications found lackluster interest in its recent rights offering, which would allow existing shareholders to buy future shares at a discount to the public price.
Also, “There is political uncertainty over export licenses, and that has cast a bit of a pall among some investors,” Bensche said.
“The picture looks pretty bleak right now, but the pendulum swings between greed and fear.”
Between June 1998 and June 1999, the stock price of publicly traded satellite companies declined by 25 percent while the S&P 500 increased by 17 percent, said William W. Sprague, president of Crest International Holdings L.L.C. No new significant initial public offerings have occurred. Satellite firms raised $3.2 billion of high-yield debt financing during this period, down from $5.1 billion during the prior 12 months, Sprague added.
Virtually all of the more recent junk bond financing occurred during the first quarter of this year when “mobile satellite systems rushed to market in advance of negative results from Iridium,” said Tracy Mehr, vice president of DLJ’s space and satellite finance group.
Therein lies a conundrum because high-yield bond buyers prefer to invest in public companies whose valuations are established and benchmarked through the trading of stock in the open market, said Ronald E. Lepes, managing director, global media and telecommunications, Chase Securities Inc.
Globalstar is a bright spot on the horizon, having successfully launched four satellites, Lehman’s Bensche said.
“Globalstar has been trading up as it prepares for a (commercial service launch) in September or October because some investors believe that Iridium’s woes are to Globalstar’s benefit,” said Thomas W. Watts, vice president of global securities research and economics for Merrill Lynch and Co. That is good news for Globalstar because it must raise an additional $600 million by September, he said.
However, market participants and observers offered conflicting views about whether at least one or two satellite companies would be able to go public by year’s end.
“There will be no new IPOs this year, and there is less than a 50-percent chance of a non-recourse debt financing,” Bensche said.
Macroeconomic conditions rather than issues related to the specific industry sector will be the deciding factor in whether satellite firms will be able to tap the public equity markets as first-timers, said Carol Goldstein, managing director and co-head of ING Baring’s telecommunications group. She said she expects to see at least a few satellite IPOs by the end of the year.
“I am relatively and cautiously positive and believe we will see one or two IPOs,” said Richard Heald, managing director of ABN AMRO Rothschild.
For the first six months of this year, there have been four public transactions altogether in this sector, $615 million in secondary equities and $350 million in convertible securities, said Davidson of DLJ.
“We will see one, if not two, IPOs by year-end,” he said.
“If not, I’ll be out of a job.”
