EchoStar swoops for Satmex

EchoStar Satellite Services is proposing to snap up struggling Mexican satellite operator Satmex in a deal worth approximately US$374m. To make its offer, EchoStar is forming a joint venture with Mexican media and communications group MVS Comunicaciones…

EchoStar Satellite Services is proposing to snap up struggling Mexican satellite operator Satmex in a deal worth approximately US$374m.

To make its offer, EchoStar is forming a joint venture with Mexican media and communications group MVS Comunicaciones in order to comply with Mexican foreign ownership requirements. The two companies already work together via their Mexican DTH JV Dish Mexico.

Under the terms of the transaction, the JV and Satmex have agreed to a stock purchase agreement whereby Satmex’s shareholders would receive approximately US$267m in cash as well as up to US$107m of the cash that is on Satmex’s balance sheet, depending on certain performance criteria. The deal is expected to close early in the third quarter 2010.

The stock purchase agreement is reliant upon the successful redemption or repurchase of a sufficient percentage of Satmex’s existing First Priority Senior Secured Notes due 2011 and Second Priority Senior Secured Notes due 2013. Satmex intends to offer to purchase all of its US$424.25m outstanding notes for cash upon the closing of the sale of the Satmex shares. The debt buyback would be funded through the US$267m stock purchase, cash and cash equivalents on-hand and the potential sale or lease of the Solidaridad 2 satellite.

However, in its SEC filings, EchoStar revealed that the debt repurchase is far from a done deal. The company stated: “There can be no assurance that the transaction will receive the requisite corporate approvals or approvals from the Satmex bondholders, some of which have indicated that they are opposed to the transaction. EchoStar may terminate the agreement under certain circumstances, including the failure to obtain the requisite approval by the Satmex bondholders.”

To that end, an Ad Hoc Committee of holders of the notes has been formed and has engaged a financial advisor and legal counsel to assess the offer. The committee represents a majority of the holders of the Second Priority notes but only a minority of the holders of the First Priority notes. During the debt restructuring negotiations of last year, the Satmex bondholders hired Jefferies to advise it on negotiations.

The transaction is also contingent upon other closing conditions, in particular actions with respect to the construction of a replacement satellite for Satmex 5. EchoStar has a right to terminate the stock purchase agreement if Satmex has not entered into the Satellite Construction ATP in a form acceptable to EchoStar, by March 16 2010 or a Satellite Construction Agreement by April 27, 2010.

Other closing conditions include verification of the operational capabilities of Satmex’s in-orbit satellites, approvals under applicable US export laws, and completion of regulatory review and receipt of regulatory approvals.

Commenting on the deal, Dean Olmstead, president of EchoStar Satellite Services, said: “The Satmex acquisition provides us with a footprint over Mexico and South America and presents us the opportunity to serve a growing global demand for satellite services. We look forward to leveraging our satellite operations and uplink expertise in North America to expand our fixed satellite services throughout the Americas, including the delivery of satellite internet to rural communities.”

If successful with its bid, the takeover would bring an end to a difficult period for the Satmex management. Having emerged from Mexican bankruptcy protection in early 2006, Satmex carried out a sales process in 2007. However, a potential deal was scuppered by the Mexican government, which owns a 20% stake in Satmex, as it refused to accept any offers below US$500m. Since then, management has been in restructuring talks with its bondholders with the parties looking at a number of options, including a refinancing, bringing in a partner, or a sale of the business.

EchoStar is being advised on the offer by Deutsche Bank and Peter J. Solomon Company, while Perella Weinberg Partners continues to advise Satmex.