Issues & Opinions

Not nearly as ripe for overanalysis as Sallie Mae, but still interesting is the news from this morning that Intelsat is on the block. Garden variety stuff, you’d think, except that private equity is rumored to be the buyer.

The firm’s present owners include Apax Partners Worldwide LLP and Permira Advisers, two London based firms that are relative mysteries to me. I’ve heard of both, but neither frequently, nor in connection with a lot of large deals. A quick look at the Apax portfolio companies informs me that there are precisely four that I’ve ever heard of, including Intelsat. Likewise, Permira, whose list of transactions (a superset of current holdings) also contains only four companies I’ve ever heard of, two of which they’ve exited already, and two of which are also on Apax’s list. I’m sure that both Apax and Permira are huge and influential, and my ignorance of their specifics is due to their primarily European focus.

Apax & Permira have (presumed minority, based on the wording of the Bloomberg story) partners in Intelsat, including Madison Dearborn Partners LLC and Apollo Management LP, based in Chicago and New York City, respectively. These firms are more well known in the US, and both have excellent reputations for competence in the field. The consortium of the four paid a reported $515 million (addendum: equity portion) for Bermuda-based Intelsat, apparently starting in 2004. (Apax-2004, Permira-2005, MDP lists Intelsat as a portfolio company at its web site, without a date, and Apollo, famously in the industry, has no web presence).

Smart guys, the lot of them, I’m certain.

Alleged to be on the other side of the rumored transaction, Blackstone, a 20 year old company recently in the news with its planned IPO for 10% of what might be valued as a $40 billion management company. The list of their exploits over the past 20 years is long, and contains many names with which you’d likely be familiar. Among that list, several communications service providers, including several in the satellite communications space: Sirius Satellite Radio (2000, now exited) and New Skies, a satellite operator (2004, now exited). It can safely be said that they know the space, having entered and exited it several times.

The interesting things about this alleged transaction are two: The sellers look to be getting $6 billion for the equity (and leaving behind $11 billion in funded debt), yielding at least a 11X return on their reported equity investment. It’s possible that, between entry in 2004 and exit sometime this year, they’ve taken dividends that can effectively be assumed to have reduced their net cash investment. So 11X is a conservative estimation of their less-than-three-year windfall. Which, by the way, good for them. But while I’m not aware of the state of Intelsat at the time they entered the business, it seems unlikely that they’ve made the company 1000% better in less than three years, so I’ll still call it a windfall should a transaction materialize. (”Windfall” sometimes has bad connotations, particularly when followed by the word “tax” - I don’t use the term in any sort of pejorative manner here)

The second thing, and a contrast, say, to the two exits Blackstone has engineered from satellite and satellite-related companies is the fact that to my knowledge, Blackstone didn’t sell those companies to other private equity concerns (financial buyers), but to strategic buyers (SES, in the case of New Skies) or the public market (IPO, in the case of Sirius).

It’s always odd, then, at least to me, to see transactions with quick exits (< 5 years), particularly at internal rates of return approaching 250%, between sophisticated financial buyers. You can't get blood out of a rock, particularly when you're buying from someone who's already tried, and based on the selling price, succeeded at doing just that.

Rational thought doesn't dictate against PE selling to PE; quite the contrary. Rational thought, in my case, dictates that there's not even any such thing as a "bad company to buy", just that the buyer needs to ensure it's getting a company which, whatever its present state, is not overpriced.

Therefore, while it would be easy to use the "overpriced" adjective on Intelsat based on the projected 3-year IRR to the selling group of PE firms, none of the players in this so-far-mild saga is anything other than quite competent, by reputation. And you don't get a good reputation in private equity by overpaying for acquisitions.

So, for now, it's going to have to remain a head-scratcher for me, pending an actual transaction, and any further information that comes to light as a result.

Addendum - Another possible interpretation is that this transaction would represent the height of hubris and stupidity, signaling the imminent demise of one of my favorite parts of the financial industry, namely financial engineering. But I’m clearly not ready to make the leap from here to end-of-bubble just yet.

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