Intelsat to Get Much Bigger, but Not Yet Profitable

Intelsat Ltd. of Washington is to become the world's largest commercial satellite operator today when it completes its purchase of the firm that had been its toughest domestic competitor.

The deal to buy longtime rival PanAmSat Holding Corp. creates a company that will carry about a quarter of the world's commercial satellite-delivered television programming on a fleet of 51 satellites and can reach 99 percent of the world's populated areas with communications services.

Intelsat and PanAmSat had flirted with a merger before, but each time the rivalry between the two proved to be too deep to make a deal.

Last August, the companies worked out their differences and settled on a $6.4 billion acquisition, which included the assumption by Intelsat of about $3.2 billion worth of PanAmSat's debt. If the deal closes as scheduled today, PanAmSat will become a wholly owned subsidiary of Intelsat, and its stock-ticker symbol will disappear from the New York Stock Exchange.

The combined company will lose money. PanAmSat earned $72.7 million last year, but Intelsat lost far more, about $325 million. Already deep in debt, Intelsat is borrowing heavily to finance the purchase.

Intelsat chief executive David McGlade said that given the level of debt and interest payments, the company does not expect to become profitable in the foreseeable future. He said the company's investors have been pleased with Intelsat's positive cash flow and its heavy backlog of orders.

Intelsat executives said the merger, approved by government officials from several agencies, consolidates companies with different strengths at a time they expect demand for satellite services to grow rapidly.

The traditional core of Intelsat's business has been telecommunications, a rough arena in recent years. The combined company will be more diverse with the addition of PanAmSat media and entertainment customers such as the British Broadcasting Corp., News Corp., Time Warner Inc. and the Walt Disney Co. PanAmSat also gives Intelsat expanded reach worldwide.

"Scale is important in this industry. Customers increasingly want global coverage," McGlade said.

Intelsat has its operating headquarters in a distinctive building on Connecticut Avenue, from which it controls its satellites. Its corporate headquarters are in Bermuda.

The company was born in 1964 as an intergovernmental organization that provided satellite communications services worldwide. It has been a privately owned corporation since 2001.

Together, Intelsat and PanAmSat would have had $2 billion in revenue for the 12 months ended in March, with about $8.3 billion in pending contracts for the next 15 years.

Even though Intelsat has now acquired its main domestic rival, the competition is far from over. The company still has many competitors overseas, some of which are deeply entrenched in their parts of the world.

"Intelsat and PanAmSat are a good match. But I don't believe it's going to create a huge, dominant player in the industry," said Patrick M. French, a senior analyst with NSR LLC, a satellite industry research company. "At the end of the day, it's still a very regional market."

Intelsat is the largest supplier of commercial satellite services to the U.S. government, doing business with the Defense Department, the State Department and other agencies that the company won't disclose. Its government business, about 15 percent of its total, is run separately from the rest of the company and has its own board of directors, whose names are kept secret.

After the deal closes, the company's management team will include several former PanAmSat executives, including James B. Frownfelter, PanAmSat's president, who will become Intelsat's chief operating officer. Joseph R. Wright Jr., PanAmSat's former chief executive, will become chairman of Intelsat's board.

McGlade said the two companies will fully integrate over the next 18 months. About 400 of the combined company's 1,400 employees will lose their jobs, including some now based in Washington.