Given all of the industry questions about a possible Intelsat IPO, I decided to spend some time an analyze the situation. This resulted in a 26 page analysis (e-mail me at amusey@SummitRidgeGroup.com) for a copy. Here is the executive summary:
In light of its May 18th $1.75 billion IPO filing, satellite industry observers are actively discussing the possibility of an Intelsat IPO. However the rumors and facts have often been difficult to disentangle. This report will attempt to shed light on the facts for forward the discussion.
Serafina, an investment vehicle controlled by several investment firms including BC partners, completed their acquisition of Intelsat in February 2008. Typically, a private equity fund has a five to seven year life and thus times its investments exits at the lower end of that range. February 2013 will be the five-year mark for Serafina’s investment; it’s natural to wonder about their exit strategy. It’s not uncommon for PE firms to use an IPO as an exit strategy and many intuitively see Intelsat’s IPO filing as the likely exit strategy. But there is much more to the story.
Intelsat lacks the growth characteristics of a typical IPO candidate. And its current debt load makes any equity value very risky. Simply put, high risk and low growth is not a compelling investment opportunity. While Intelsat could potentially attempt to go public based on a high dividend, much like a utility company, its high debt would make the dividend highly risky. Other FSS companies with lower debt are offering dividends near 4% annually, meaning Intelsat would have to offer significantly higher dividends of offset the higher risk. But higher dividends would not counter the company’s need to lower its fixed payments on debt and other capital.
Rather, the purpose of an Intelsat IPO would likely be to reduce its debt burden and create a vehicle to allow it to eventually refinance or convert other debt securities into equity-related securities. Intelsat would still be a low growth company, but if it could make a compelling case for continued moderate growth, and an ability to manage its post-IPO debt, the leverage could increase the return to the stock, making it a very reasonable IPO candidate. But a number of things would have to go right for the company. An IPO would create a public vehicle that could ultimately facilitate an exit for Serafina, but is unlikely to create an exit opportunity for in the near-term.
Update: April 10, 2013: We’ve decided to release our Summit-Ridge-Complete-Intelsat