Tuesday, April 17, 2007

The Dark Side of Intelsat's Privatization

Once upon a time Intelsat operated as the International Telecommunications Satellite Organization, a global cooperative, with small debt and the ability to borrow more at near governmental rates. Intelsat dominated the global marketplace primarily because its government "signatories" agreed not to cause the gooperative "significant economic harm" by authorizing competing systems.

The U.S. government properly determined that satellite competition could occur without harming Intelsat's mission as the carrier of last resort. PanAmSat and other ventures thrived and Intelsat adapted to change, ultimately becoming a private venture. Ironically the privatized Intelsat subsequently acquired it former nemesis PanAmSat.

Intelsat never got around to an Initial Public Offering of stock as it became an easy mark for private equity investors who now seek to cash out their $515 million investment with an expected 6 billion dollar sale. Along the way Intelsat lost its blue chip debt risk, because the private equity players saddled the venture with $11 billion in debt.

The dark side of Intelsat's privatization is the extraordinary leverage risk undertaken by Intelsat's private, unregulated investors. In the satellite marketplace few players can come up with the equity and debt necessary to construct, insure, launch and track a constellation of satellites. A back of the envelope cost is about $300 million per satellite. The undertaking has significant risks, exacerbated by the statistic that on average one of three satellites fail to reach orbit or otherwise become operational.

While I generally endorse privatization, in Intelsat's case, the private equity gambit has left the venture at greater risk than prudent in light of the extraordinary role performed by the very few global satellite players that remain. For many nations off the major telecommunications grid, with little or no access to fiber optic cable trunks, Intelsat serves as the only carrier capable of providing global connectivity.

How ironic that the United States government worries about the prospect of a competing non-American global positioning satellite navigation system, but has no concerns about the extraordinary leverage risk Intelsat has incurred.

1 comment:

ilanit said...

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