M&A activity resurfaces as economic chill subsides

Eighteen months after the meltdown of the global economy, space industry players are starting to drift back towards significant M&A transactions in order to both gain scale and diversify their revenue streams.
The most high profile example of this is,…

Eighteen months after the meltdown of the global economy, space industry players are starting to drift back towards significant M&A transactions in order to both gain scale and diversify their revenue streams.

The most high profile example of this is, ironically, EchoStar’s attempted US$374m takeover of Satmex, which fell through after resistance from the Satmex bondholders.

Despite this, the will was there on the part of EchoStar, and if a similar opportunity were to arise in any market this year it is likely that operators will be more inclined to consider an acquisition.

One market where movement may be more pronounced is Asia, where speculation is mounting that Measat is set to follow its sister company, Astro All Asia Networks, and be taken private by owner Ananda Krishnan.

Thaicom, or more accurately its space assets, could conceivably become available depending on whether the Thai government decides to withdraw its concession in the wake of corruption charges relating to former owner Thaksin Shinawatra.

One banker on the finance panel at the recent Satellite 2010 conference in Washington DC said that Asian companies would look to streamline their ownership structures.

Billy Goldstein of Macquarie Capital Partners said: “There will be a push from some companies to rationalise portfolios and clear up ownership structures. In the Asia Pacific market there are some companies with convoluted ownership structures, and it’s likely that some will use equity to address this.”

Private equity firm Cerberus Capital Management’s investment in GeoEye shows that the range of investors attracted to the industry is starting to rediversify, and that is a trend that can be expected to continue in 2010.

On the low-cap front, companies that preserved ready cash flow sources during hard times are starting to put their available capital to good use.

Three examples of this occurred in March in the manufacturing and antenna markets. Orbital Sciences’ purchase of General Dynamics’ satellite unit allows it to widen the range of spacecraft it can offer, while Gilat’s acquisition of RaySat Antenna Systems and Integral Systems’ purchase of CVG Inc are critical steps forward in their ambitions to grow their presence in the military market.

However, the broad consensus on the finance panel at Satellite 2010 was that the return of transformational deals is still some way off.

Xavier Bindel of JPMorgan Chase said: “Companies are building liquidity, so there’s no reason to act immediately. In term of transformational deals it is going to be difficult to take such risks in the current markets. With M&A, the question is whether major players should take risks for value addition.”

Meanwhile, the global bond markets continue to be the destination of choice for large satellite companies looking for fresh funding. Over the past year, both in the US and Europe, institutional investors have poured their funds into corporate bond issuances, while even high-yield issues have drawn demand.

On the finance panel at Satellite 2010, Randy Russell of Deutsche Bank remarked: “Since March 2009 the wider performance has been notable, we have seen investors come back strongly to the sector. The high-yield market did a good job in bringing large amounts of credit into sector.”

Such is the demand at the moment, Eutelsat successfully completed the roadshow and issue of its inaugural bond in less than a week. The satellite operator raised E850m of 7-year senior unsecured notes, while giving itself some financing flexibility through a new E450m 5-year revolver.

That transaction came on hot on the heels of SES placing a E650m 10-year Eurobond. Both satellite operators’ issuances were around 4.5x oversubscribed.

Over in the States, the popularity of Sirius XM’s junk bond offering showed that it is not just investment grade issues that are attracting investment. The satellite radio provider upped the size of its 8.75% 5-year senior unsecured note issue by US$250m to US$800m following strong demand. At the same time, Sirius’ corporate grade cousin DirecTV, a serial tapper of the bond markets, netted US$3bn via a triple tranche issue.

The proceeds from all of these issues had the same purpose – to repay existing debt and extend the overall maturity. Indeed, while there are increasing signs that satellite companies are begin to look beyond organic growth to gain scale, strengthening the balance sheet remains the satellite CFOs’ number one priority.