A year ago, "satellite" was a dirty word on Wall Street. Billions had been lost on pie-in-the-sky schemes to capture voice, data, video and Internet traffic. And, with competition from millions of miles of unused terrestrial fiber-optic lines driving down prices, satellites looked to be the sort of slow-growth, low-margin business that investors shunned.
But suddenly satellites are hot again, with big-name private equity firms tripping over each other for a piece of the action. It started back in December, when Inmarsat was scooped up by Apax Partners and Permira Advisers, a pair of London firms that outbid George Soros. Then chunks of Eutelsat, the European consortium in the midst of privatization, found their way into the hands of American firms like Texas Pacific, Spectrum Equity Investors and Lehman Brothers. In April, Kohlberg Kravis Roberts (KKR) beat out a who's who of private equity firms to purchase PanAmSat from Rupert Murdoch, then turned around and sold minority shares to two losing bidders, Washington's Carlyle Group and Providence Equity. Last month, the Blackstone Group picked up New Skies.
With each purchase, the price kept creeping up, from just over six times operating earnings to 7.6, a 25 percent increase in valuations.
Now the focus shifts to Washington, where two big players are on the block.
Having sold off PanAmSat, Murdoch is now shopping Hughes Network Systems, a hodgepodge of profitable telecommunications service businesses that employ about 2,000 people in Germantown. One provides Internet service to homes and business; another allows big companies to communicate with outlets or suppliers around the world, keeping track of sales or checking credit cards at gasoline pumps. The real wild card in the mix, however, is a $1.8 billion program to develop and build two next-generation satellites with 10 times the speed and capacity of those now in use.
Word in the industry is that the bidding is down to Texas Pacific and one or two other firms, with a selling price north of $400 million.
Meanwhile, Intelsat, with 850 employees in the District and the world's largest fleet of satellites, could fetch as much as $5 billion by the time a sale is announced later this month. KKR, Blackstone and Apax/Permira have looked to see if it makes sense to merge Intelsat with their recent purchases. And for two other buyout teams -- Bain Capital with Thomas H. Lee Partners and Apollo Management with Madison Dearborn -- Intelsat may be the last remaining ticket to the satellite ball.
There are two ways to think about these developments and how they play out for the Washington economy.
The positive view is that the stars are finally aligned for the needed consolidation of an industry now moving from government control to private ownership. While the IPO market dislikes slow-growing industries, banks and bond markets are attracted to the satellite industry's reliable stream of cash and are willing to finance heavily leveraged buyouts favored by private equity firms. The hope is that these tough new owners will finally bring financial discipline to an industry run by engineers too enamored with their own technology.
The more cynical view is that private equity funds with too much money to invest and too few good opportunities to invest in are now exhibiting a kind of herd-like behavior we've seen before on Wall Street. They overestimate efficiencies to be gained, and profits to be made, by consolidating an industry where the big costs -- buying and insuring satellites -- don't lend themselves to big efficiencies of scale. And since these financial buyers need to sell out in a couple of years, they're not really interested in making the kind of capital investment necessary for long-term growth -- bad news for the companies and a local economy that depends on them for thousands of good jobs.
No matter how it comes out, however, one sure winner will be Bethesda-based Lockheed Martin, whose ill-fated purchase of Comsat three years ago left it with major stakes in Inmarsat, New Skies and Intelsat -- stakes that could now be worth $1.5 billion.
Steven Pearlstein can be reached at email@example.com.