|Eutelsat’s next move – and satellite’s long-term prospects
By Chris Forrester
There’s rarely a dull moment in the satellite business, but currently two topics are occupying the minds of European industry observers. Topic 1, undoubtedly, is the prospects for high-definition TV over the next year or two, and we’ll examine these expectations in greater detail in a moment. Topic 2, and no less important, is the question over what Eutelsat will do with its fresh pile of cash.
Eutelsat mounted its long-awaited Initial Public Offering (IPO) in October, following the trend set over the past months by Intelsat, Inmarsat and PanAmSat. Now seemed as good a time as ever, with an optimistic market able to take a more reasoned view of the satellite sector having put behind it the hard lessons of a few years ago and losing more than a few shirts on the whole LEO/Iridium/ICO/Globalstar nightmare. In other words satellite is not just respectable again, its investment possibilities are fully recognised, and blessed by the toughest of all bodies the private equity funds. The old Wall Street saying, of “Follow the Money” has never been truer. Of course, ‘following the money’ also means that someone is there before you, but we’ll ignore that for the time being.
The Private Equity firms recognised that with their long-term contracts in highly-valuable video service contracts, satellite operators were up for sale at highly attractive prices. Eutelsat, helped by a thumping $1bn fresh contract from Sky Italia, now has more than €4bn of forward sales, equivalent to about 5.5 years of guaranteed revenue. Indeed, this strong cash generation is part of the appeal of Eutelsat's $1bn+ IPO, that will put at least €860m into its bank account. Eutelsat also offers a predicted dividend yield for their next financial year of 4-4.5 per cent. Eutelsat’s indicative IPO price range of €15.25-€17.75 is not unreasonable, based on Eutelsat's own projections for capital expenditure and guidance of at least 4% annual revenue growth in 2007-09. Wall Street analysts will have examined Eutelsat’s average cost of capital of 8%, built into its numbers, as well as an anticipated 2.6% growth more or less in perpetuity, which gives them the all-important discounted cash flow valuation at the bottom end of the offering range.
However, at every industry conference, certainly for the past five years, the primary theme of debate has been ‘Who will be the next pair to merge?’. But now that Intelsat and PanAmSat have tied the knot, so to speak, where does this leave Eutelsat, which incidentally now cheekily describes itself as the world’s third-largest satellite operator. CEO Giuliano Berretta admits that the fresh cash launches Eutelsat onto its next phase of development. “We remain as excited as ever about the outlook in our sector, and are convinced that the IPO will enable us to fully realise our potential,” he said recently.
But what exactly is Eutelsat’s potential? It’s no secret that PanAmSat itself attempted a marriage proposal to Eutelsat, and while Intelsat+PanAmSat makes a big meal for the two players to swallow, no doubt a year or so from now they’ll be hungry again, and Eutelsat would still supply some highly-attractive slices of market capacity over Europe, the Middle East/Asia and Africa. SES Global’s president Romain Bausch, speaking at a Paris conference in September, is of the opinion that Intelsat+PAS still fancies Eutelsat. Eutelsat’s primary appeal is its high-margin video traffic (68% of overall revenue), not least its ‘Hot Bird’ fleet, which pumps more than 1000 TV channels to viewers throughout greater Europe. Of course, the real consolidation value would come if SES Global mopped up Eutelsat, but European monopoly anxieties would almost certainly rule that out.
Eutelsat’s anticipated growth is, however, much less than SES Global’s. Eutelsat also has to fund some hefty dividend expectations that might put a strain on its longer-term ability to move quickly. Eutelsat, even after paying down some debt, and with its Private Equity owners perhaps monetising some of their remaining stakes, would still be in an excellent position to finance a few meals of its own. "We don't exclude external growth," said Jean-Paul Brillaud, deputy CEO, talking to the Financial Times. "If opportunities present themselves we will examine them." Brillaud’s words echo similar statements from every operator.
The problem for all operators is that the low-hanging fruit has been picked. There are plenty of individual cherries still on the tree, not least a dozen or so smaller operators in the Asian region. But most of these are seen as being government-owned or backed, and seen as national flag-carriers where consolidation is the furthest thing from their minds. Mopping up these players is seen as being especially challenging, and perhaps not worth the effort. A similar argument might be made for the world’s other regional players, not least Latino operators, or Canada’s Anik. They’re not going to fall easily to consolidation. But never say never.
Earlier in this piece I used the phrase ‘in perpetuity’. The trouble is that in today’s broadband-driven world, ‘in perpetuity’ might be equated to a grave niche in an Italian cemetery, where ‘in perpetuity’ means about 6 years. Which coincidentally is not so different from satellite operators’ backlogs. But what if, say in the next 10 years, we are all high-speed broadband (or ADSL2+) equipped? Take this fact: Sweden, a sparsely populated (9m population) Nordic country, still manages to connect 85% of its population by high-speed broadband (measured at speeds of half a megabit or more). “Big deal”, you might say. The difference is, like South Korea, Sweden is looking to supply speeds of more that 8 Mbps – and looking to take fibre to the home (not to a nearby node or even the kerb, but into the home) at least in its cities and towns, and already frequently supplying 100 Mbps. This led Andrew Barron, CTO at European pay-TV platform ViaSat to say “Soon, we’ll be able to deliver [content] on a unicast basis initially [via Broadband], and very shortly on a multicast basis, where the economics trounce the normal broadcasting economics of satellite.”
“Soon, we’ll be able to deliver [content] on a
unicast basis initially [via Broadband], and
very shortly on a multicast basis, where the
economics trounce the normal broadcasting
economics of satellite.”
Barron says that his enthusiasm for broadband spreads to the rest of Europe. “There are an estimated 300,000 expat Swedes living in London. Why can’t they enjoy our programming?” he asks. Barron said that for the past 40 years the entire content industry had grown up with a geographic entity in mind. “When we do reality shows we do them for an eight o’clock slot on a channel in Sweden. [Our focus] is all-geographic, and the way the industry is managed stations, platforms, companies, it’s all geographic”. He added: “the whole industry is based on a model which from a technological point of view is now irrelevant and as we arrive in our markets to a state where there’s ubiquitous Internet access, including fairly shortly mobile access, we’re left with digital rights management as the definition of footprint rather than reach or regulation or programming concept.”
While there are plenty of homes with sub-1Mb speeds, for whom satellite and cable delivery is the only option, the moment you start delivering 4Mb+ into homes then the balance of power might start shifting, from mass-market packagers of content (DirecTV, BSkyB, Canal Plus, or ViaSat) towards specialist packagers. And the iPOD video device makes that more likely than not.
But thank goodness for HDTV. High-def is bandwidth hungry, and satellite operators love HDTV. And Europe has gone HD crazy. As this is written Europe has just one full-time HD channel (HD1, from Belgium’s Euro1080). By Christmas there will be at least 7 full-time channels (see table). The twin-channel free-to-air HD satellite offerings from Munich-based Pro7-Sat1 started on October 26, while Premiere’s 3-channel HDTV pay-TV service goes live on November 19. This means that by year-end, including Euro1080/HD1, Europe will have at least 7 live HDTV channels, plus another handful of promotional barker channels, with BSkyB, Canal Plus and Sky Italia’s high-def channels all promised by mid-2006, and between them taking the total to about 20 HD channels.
HDTV in Europe: current status*
Pan-European Euro1080/HD1 Jan 2004
“ Euro1080/HD2-HD5 Now live
Scandinavia C-More Live Sept 2005
France-Demo HD Forum Now live
France-Demo Canal Plus Demo Live (“early 2006” for full service)
France TPS (No formal date yet)
Germany Premiere Demo Live (full service Nov 19)
Germany Sat 1 Live October 26
Germany Pro 7 Live October 26
Italy Sky Italia “mid-2006”
UK BSkyB Now testing. 6+ ch’s expected Feb 2006
This is good news. The bad news is that no public broadcaster has yet confirmed any sort of transmission plan for HD. Germany’s two channels (Pro7/Sat1) are commercial networks that initially will simulcast largely SD material that’s been upconverted, plus some HD movies. Over time its ‘pure’ HD output will increase. But Germany’s publicly-funded networks are most reluctant to get involved in HD, and assorted sources suggest there’ll be no HD action from them until 2008, despite the promise of next year’s soccer World Cup being hosted by Germany. Commercial network RTL, market-leader in Germany, might move much sooner if only to face the challenge from Pro7/Sat1.
However, this is a somewhat bizarre turn of events, where it is a couple of commercial networks that are leading the push towards high-def. In the UK most observers expect the BBC to make a move in the next year (they’ve already a test channel on satellite). There is absolutely no enthusiasm from the UK’s commercial stations (other than pay-TV broadcaster BSkyB, of course). Same with Sweden where SVT is apparently enthusiastic, and Italy where RAI have been experimenting for years.
But Italy’s huge commercial broadcaster Mediaset with a handful of networks (that used to be controlled by Silvio Berlusconi) is not at all interested in HD. Manlio Cruciatti, CTO at Mediaset, derided the “image purists” who cited HDTV’s quality yet ignored the excellent images available within SD. Using a very Anglo-Saxon expression, he said in his view Europe’s approach towards HDTV was “a complete ball-up”. He asked where the terrestrial frequencies were, for example. “We’ve been buying switchable HD cameras for the past 3 years, like everyone else. But we have 5 production centres and 30 studios. It cannot happen over night. But we’re on the same bus as everyone else.”
“At News Corp., we firmly believe people WILL buy HD sets, ergo, they’ll want to watch HD programmes on these sets.” David Hill, chairman Fox Sports
But the last word on HDTV, at least for this month, has to go to Fox Sports (and president of DirecTV’s entertainment group) David Hill, who in a marvelous keynote at the recent IBC convention in Amsterdam covered the reasons for Fox’s switch from SD to (initially) 480p and now 720p images. “By 2007 we’ll be delivering some 1500 local channels in HD, and at least 150 network channels, to almost every home in the US. At News Corp., we firmly believe people WILL buy HD sets, ergo, they’ll want to watch HD programmes on these sets,” he argued. He said that anyone with a history in television had seen constant progress over the years, whether via the introduction of colour, or surround sound, or digital TV. “It is important that these developments are mostly transparent to viewers. What they want is news, sports, movies and good entertainment. They didn’t care how the show was shot. The last time viewers got excited by TV was when colour came in. Then they went out and bought new sets in droves. They are doing the same today because of HDTV.”
Hill is right. But the satellite world can only hope that DirecTV’s commitment towards HDTV is permanent – and not just for an Italian version of ‘in perpetuity’.
“Soon, we’ll be able to deliver [content] on a