Intelsat’s recent management shake-up may suggest management has given-up on the IPO. If not, the company sent negative signals to investors that may setback the IPO prospects even further.
Intelsat management shake-up included several senior-level promotions and the departure from daily operations of their highly credible General Counsel, Phil Spector. Mr. Spector also ran the company’s business development efforts. Ordinarily, this would not raise a lot of eyebrows. People are promoted and leave companies all the time. But this seems different.
Intelsat is heavily levered with a credit rating several steps below investment grade. Many analysts are concerned about it’s ability to manage the debt, which is dangerously close to (and may, in my view, even exceed) the company’s total value. Most analysts agree that its only likely way for Intelsat to repay its debt outside of a restructuring is through a successful IPO. But the IPO process is itself hampered by the company’s debt load. Additionally, Intelsat has shown very little growth over the past few years. And it just reported disappointing Q4 results that suggest growth, might be slowing even further. The impact of softening government demand and challenges in Africa are likely, in my view, to get worse over time – not to mention the industry price-risk associated with new HTS satellites coming on line. In the best case, the needed IPO is going to be challenging.
Its unlikely Phil Spector would step-down voluntarily if he felt the company was on target for a successful IPO. According to my reading of Intelsat’s 2012 10K, he has an incentive package including vested shares and options it valued at over $22m. A successful IPO would likely increase this value significantly. But Intelsat can repurchase those shares at fair market value as of his departure. This, as I understand it, would deprive him of any upside from the IPO unless it happens within six months. If an IPO were likely, he would probably have wanted to stay on to ensure recognizing that upside.
But its also unlikely Intelsat would push out a credible long-term General Counsel just prior to launching a challenging IPO, absent egregious behavior on his part. It reduces the perception of depth and stability of the management team. And if he had been involved in egregious behavior, its hard to believe they would have offered him a conciliation seat on the board.
I’ve never met the new General Counsel and Chief Administrative Officer, Michelle Bryan. But I hear she is quite competent and hope to meet her someday. However, if I were going to hire a General Council prior to a tricky IPO, I would do a search for one with recent IPO experience, not someone who has been running HR for six years and whose prior GC experience is notable for work with distressed companies in the bankruptcy/restructuring process. A 2003 US Airways press announcing her departure, indicates she spent her last year, “overseeing the legal and government affairs responsibilities associated with the airline’s successful application for a federal loan guarantee and its restructuring under the U.S. bankruptcy code” and was lauded for “keeping the [bankruptcy] process on track and successful.” According to Wikipedia, US Airways was one of the first major airlines to terminate its pilot’s pension program to cut costs. After leaving US Airways, Ms. Bryan spent nine months at Laidlaw, where, according to an Intelsat press release upon her hiring, she addressed corporate governance and compensation issues – this was during Laidlaw’s recovery from bankruptcy (late 2003/early 2004) when such issues are common. No mention was made of any involvement in Laidlaw’s NYSE listing in 2004. If Intelsat is headed for a restructuring, her skills seem perfectly aligned for the job. Simply put, when highly levered company swaps a well-regarded member of senior management, for no apparent reason, in favor of one with seemingly notable restructuring experience, it is not a comforting signal to potential equity investors.
There is also the curious issue of the management promotions shortly after reporting disappointing year-end results and publically downsizing the IPO target from $1.75B to between $750M to $1B (the company needs to maintain at least a public façade of a planned IPO or its credit ratings will be in jeopardy). Dave McGlade was promoted to Chairman, Michael McDonnell gets the added responsibility for business development, Michelle Bryan as previously mentioned, was promoted to General Counsel and Chief Administrative Officer. Additionally, Thierry Guillemin was promoted to Executive Vice President and Chief Technical Officer. Mr. Guillemin may be a great executive (I don’t think I’ve met him) and he may be totally blameless for last month’s Intelsat 27 launch failure (which may have even unexpectedly helped the company) and deserving of a promotion. But, from a PR perspective, a huge technical failure is curious backdrop against which to promote the top technical person. If this is the way the board handles disappointing results – management promotions – it is, in my view, going to make investors additionally skeptical about participating in the IPO.
But I doubt the savvy private equity firms controlling Intelsat are this seemingly daft and/or tone deaf to investor concerns. A more plausible scenario, in my view, is that after the Q4 numbers and the Intelsat 27 failure, it became increasingly apparent to senior management that the IPO wasn’t going to happen. A restructuring was increasingly likely and the management team’s equity incentive packages were now largely worthless. To keep the team at Intelsat through the process, however, the board may have seen fit to give them promotions to burnish their resumes so they can get better jobs when its over. This may have been more palatable than giving them additional cash compensation. But at age 62 and with a stellar resume, this would likely be less appealing to Phil Spector. By splitting his titles (GC and head of Bus Dev) they could offer two other promotions. In the process, they get a GC with the HR and Legal skills needed in the event of a restructuring.
This may or may not be what’s actually happening – I don’t know. But the recent actions, in my view, are highly consistent with this scenario. Some industry observers attribute recent management changes to internal politics. It’s certainly possible that management priorities put internal politics above giving the critically needed IPO the best possible chance, and that the board was willing to go along with them. To be clear, I have no knowledge that this was the case. But if it was, that’s another reason investors might be cautious about investing in the IPO. Either way you look at it, the recent Intelsat management moves do not seem to bode well for an IPO in the near future. I hope there is another, more innocuous alternative that I am missing.
UPDATE: 3/14/13 @9:50AM — A few people have pointed out that Intelsat picked probably the worst possible time to make these awkward announcements — a week before the Satellite 2013 Conference. This almost assures they will receive the maximum possible industry and press scrutiny during the conference. I honestly can’t think of a logical reason for this timing.