KKR Beats Out LBO Teams To Win PanAmSat: “Analysts don’t rule out that the new owners will take the company private and do an IPO a few years later.

In a deal that confirms that private equity players are major investors in the communications field, buyout giant Kohlberg Kravis Roberts & Co. won an auction in April to acquire a majority interest in satellite operator PanAmSat Corp. from DirecTV Group Inc. for approximately $4.3 billion, including the assumption of about $750 million of debt. PanAmSat, the country’s third-largest satellite provider, primarily leases satellites to TV networks that use them to deliver programming to local cable TV systems and broadcast stations. The company broadcasts about 2,100 channels globally over a network of 24 satellites. KKR beat out two other private equity groups – one composed of Blackstone Group, Carlyle Group, and Providence Equity Partners, and the other comprising Thomas H. Lee Partners, Bain Capital, and Quadrangle Group. The nature of the competition identified the target as the type of cash-generating enterprise that financial buyers like. DirectTV Group, formerly known as Hughes Electronics, will sell its 80.5% stake in the satellite company to KKR. To one analyst, owning that partial stake might lead to buying out minority holders. “Until they (KKR) reach 90% ownership, they will have to run the company in an arm’s-length manner, so you may see a minority squeeze-out or some other technique to get them up to 90% ownership,” says William Kidd, an industry analyst at Venture Research in Greenwich, Conn. In addition to possibly striking a deal with minority owners, Kidd says he expects KKR to cut costs and leverage the balance sheet. He doesn’t rule out that the new owners will take the company private and do an IPO a few years later. “This is a business with 400 to 500 customers that is basically stable and throws off a decent amount of cash, so they have a lot of options.” As part of the deal, DirectTV has agreed to expand certain business agreements it has with PanAmSat, at market rates, to ensure future revenue streams to PanAmSat and continuity of services for its DirecTV Latin America and Hughes Network Systems Inc. units. Curtis Symonds, President and CEO of Symonds Synergy Group, an Arlington, Va.-based consulting firm, notes that once KKR completes the deal, which is expected to close in the second half of this year, the private equity owners could accelerate its payback by selling off pieces of the company. “Some of PanAmSat’s regions might be sliced off and sold to foreign operators,” he states. Symonds, a former EVP of Black Entertainment Television (BET), said PanAmSat would likely hold onto its North American geographic coverage but might part with sections of its fleet that transmit to less developed markets. Some European satellite operators were said to be interested in the PanAmSat assets but didn’t enter the final rounds of bidding because of the desire of DirectTV owner News Corp. for a quick sale. Their thinking was that because of national security concerns, any PanAmSat sale to a foreign acquirer would necessarily be on a slower track. Industry followers say that the PanAmSat deal resembles the investment made by Eurazeo, a French private equity firm that paid $485 million in February to buy about a 23% stake in European satellite company Eutelsat from France Telecom. Eutelsat was a principal rival of KKR in the PanAmSat auction. So either a European private equity group or a satellite operator might be interested in taking on parts of PanAmSat’s asset sell-offs. Venture Research analyst Kidd says he expects to see more consolidation in the industry. Certainly, DirecTV has stated that it wants to sell a second business, Hughes Network Systems, which provides broadband satellite equipment and services for businesses and consumers, and is hoping to offer high-speed Internet services. The sale of PanAmSat and prospective sale of Hughes Network Systems would enable News Corp. to pare down debt and position DirecTV to compete for North American satellite and cable TV viewers more aggressively. Copyright 2004 Thomson Media Inc. All Rights Reserved. http://www.thomsonmedia.com http://www.majournal.com