Consolidation in the FSS industry

Since its inception in the early 60s, the Fixed Satellite Services (FSS) industry has always been a growing business, first with the development of long distance telephony, then with the introduction of television broadcast to cable head-ends in the 80s and to home dishes in the 90s. In the late 90s, with a television market reaching maturity in a number of regions, many operators saw consolidation as the way forward to ensure the continuous growth of their business by rapidly securing popular high-value high-power broadcast television orbital slots and by better meeting the ubiquitous Internet connectivity expected by Internet Service Providers.

1997	Loral acquires 100% of AT&T Skynet PanAmSat-merges with Hughes Galaxy GE Americom acquires 28.7% of Nahuelsat
1998	Loral acquires 75% of SatMex Loral acquires 100% of Orion Network Syst.
1999	SES Astra acquires 34.1% of Asiasat
2000	SES Astra acquires 20% of Star One SES Astra acquires 50% of NSAB GE Americom acquires Columbia Com.
2001	SES Astra and GE Americom merger Eutelsat acquires 27.69% of Hispasat Singtel acquires C&W Optus
2002	Eutelsat acquires 100% of Stellat

Over the last two years, bankruptcy, cancellation of expansion plans, termination of broadband projects, and free-falling stock prices have been everyday fare for the telecommunications industry. The Internet revolution that was to drive a third growth cycle in the FSS sector failed to create the necessary conditions. Although it is worth noting that the FSS downturn is less brutal than that of terrestrial operators, i.e. no major bankruptcies, limited over-capacity and reasonable price decline, the FSS industry has been badly hit, as reflected by the FSS operator composite index which has plunged 80% from its peak value in Q1 2000.

In this appalling context, the FSS industry is expected to further consolidate as acquisitions or mergers are the only option for satellite operators to maintain an attractive growth perspective while seeking to improve efficiency and reduce risk in their operations.

With the satellite video industry reaching maturity in North America and Europe, operators have no choice but to look for geographic expansion. Mergers or acquisitions of regional operators are preferred in most cases to an organic expansion strategy. In practice, organic growth is a challenging obstacle race and hence rarely an option. Securing necessary regulatory approvals, obtaining a coordinated orbital slot, establishing a local sales force, launching a satellite and developing an attractive video neighborhood can take many years during which local competitors continue their own development, thereby making a new entrant’s job even more difficult. Hispasat’s entry in the Latin American market certainly constitutes the most remarkable example of successful organic growth. However, key to the success were the historical and cultural ties between Spain and Latin America, together with a privileged access to Spanish video content. A simple review of existing operators shows that very few other players can benefit from the same synergy in foreign markets. Therefore acquisitions constitute the most obvious way to gain access to market and to video customers in the most promising markets.

Consolidation enables consolidated operators to combine their respective know-how to make the consolidated firm more attractive to customers while optimizing their service offering on a wider customer base. The replication of a service in several regions affords operators the opportunity to roll out their offer on a larger scale, thereby benefiting from economies of scale and risk reduction. The most striking example is the merger between GE Americom and SES Astra which has enabled SES Global to develop video contribution services in Europe and to contemplate a hot bird business model in the US with its Americom2home project. PanAmSat, following its merger with Hughes Galaxy, gained a strong foothold in the US, which significantly improved its video and Internet connectivity solutions. Broadband is a typical case of how dedicated development costs can be shared between a broad client base and risks mitigated if some regions grow more slowly than others. This is illustrated by SES Astra, NSAB, Asiasat and Star One, which jointly deployed Astra-Net, the SES-Astra multimedia platform.

Global operators can also benefit from significant economies of scale in the procurement, launch and operation of satellites. When procuring satellites and launch services, large operators have and can wield stronger bargaining power. If needed, they are in a position to negotiate bulk orders, thereby potentially securing volume discounts. In bad market conditions, large operators still benefit from very favorable prices thanks to vendors’ hopes that clients will remain loyal when market conditions improve. Large operators also benefit from economies of scale on the operations end, in particular by centralizing their control stations and optimizing training of technical staff.

Finally, consolidation allows operators to mitigate the risks associated with their operations by giving them the benefit of satellite back-ups, by enabling them to further rationalize their fleet, and by diversifying their revenue sources. To illustrate, up to 1999, SES generated 100% of its revenues from only a few large European platform operators. Following a series of acquisitions, SES Global was able to considerably hedge its revenues, as shown by its 2001 figures: the number of customers has dramatically grown with 40% of its revenue coming from non video applications while North America, Asia and Latin America now represent 41% of its revenue. From a general standpoint, consolidation leads to wider groups with larger assets, lower risks and superior access to corporate and project financing.

In the late 90s, three major global players emerged: PanAmSat, Loral Global Alliance and SES Global. All had resulted from a series of mergers and acquisitions, but through very distinct paths.

PanAmSat, originally a typical entrepreneurial company, became one of the most powerful operators in the world following its merger with Hughes’ Galaxy satellite fleet in 1997. Loral Global Alliance is the result of a series of transactions begun in 1997 that includes acquisitions of 100% of AT&T’s Skynet FSS business, 75% of SatMex, and 100% of Orion Network systems, and the EuropeStar joint venture with Alcatel. For eleven years, SES grew its European business organically, with an exclusive focus on television broadcast services. Then, in 1999 and 2000, SES became the most active buyer of the entire sector with four acquisitions in a row in Asia, Latin America, Europe and lastly in North America. SES Global is now the largest operator worldwide.

These three newly formed global operators have effectively changed the rules of the FSS business into a race for consolidation, where the aim of the game is to gobble or be gobbled. The recent privatization of Intelsat and Eutelsat, two former inter-governmental organizations, is further exacerbating the hunt for acquisition targets. All operators are not on the same footing for the next round of consolidation: a few have gained a clear advantage while others will need to do considerable preliminary homework for them to play a decisive role.

FSS satellite operators can be placed in one of the following three groups: nationals, prey and predators.

The so-called “Nationals” are operators such as Insat, Binariang or Turksat that have typically been set up as national standard bearers whose mission is to serve their country's interests and needs in space telecom infrastructure. On the one hand, their capital structure remains largely under government control, thereby preventing potential predators to contemplate acquisition. On the other hand, their political flavor and, in most cases, their limited financial strengths bar them from looking for a global presence through internal or external growth. These operators are thus not likely to be part of the next round of consolidation, neither as predator, nor as prey for operators intending to grow their operations through acquisitions. However, this situation may rapidly change with the deregulation of the telecom industry and as the sense of the best national interest evolves. To illustrate, Nilesat, a typical “national” operator is currently looking for a partner to further develop its business.

Typical Prey enjoy a leading presence in their domestic or regional market and have usually attempted to expand beyond their core markets. However, they generally lack sufficient financial strength to feed global ambitions of becoming active global consolidators of the industry in the short term. Eutelsat, Telenor, Telesat, APT and ShinSat are among the most attractive operators likely to become prey in the next consolidation phase, as is NewSkies, though it presents a special case. Unlike the others, NewSkies' distinct position lies more in its global coverage than in its being a leader on a domestic or regional market. A strong regional player coveting rapid access to global coverage could, therefore, target it.

The Predators group is currently restricted to four players, the precursors of the consolidation trend - SES Global, Loral Skynet and PanAmSat - and a newcomer, Intelsat. Due to their global presence and the quality of their existing assets (and severe financial constraints in the case of Loral Skynet), historical predators are unlikely to be very active in the short term, with the possible exception of PanAmSat, which would benefit from a stronger presence in Europe and in Asia as exemplified with its on-going effort to move closer to JSat. Intelsat has a relatively weak position in the television business and has few other options than to acquire one or two regional operators with a compelling video neighborhood.

Operators’ financial health, their ability to build up a strong business case and to optimize their assets will determine their ability to target or to become attractive prey. The roles are not that rigidly defined; presumed preys could fight to become predators, while weak predators could be forced to review their ambitions. As long-term survival of both prey and predator relies on access to high potential markets and financing resources, further consolidation of the FSS industry is bound to happen. In the short term, Intelsat, Eutelsat, and PanAmSat will be prime players in the next consolidation round. Their future positioning depends on how cleverly they maneuver their way through the expected shake-up which will change the face of the FSS competitive environment.

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	North Am.	Lat. Am.	Eur.	ME Africa	Asia	Trans Atl.	Trans Pac.
SES Global
PanAmSat
Loral Global Alliance

	Predators	Prey	“Nationals”
Description	Regional and global players, with unique financial, technical and market strengths	National and regional players with a distinct strong position	National and regional players with a “political” mission
Business rationale	Think global, act local, and develop cross synergies	Capitalize on unique market access	Contribute to the economic development of the State