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Home , COMSAT, Intelsat, Intelsat 7, PanAmSat

WILMER CUTLER PICKERING HALE AND DORR LLP

COMMUNICATIONS

LAW UPDATE October 7, 2005

Intelsat and PanAmSat Agree to Merge

On August 29, 2005, , Ltd. (Intelsat), Terrestrial Relays. Seeking better technological the second largest commercial options for international phone and televi- company (in revenues), announced that it sion service, Clarke observed that a “space would acquire PanAmSat Holding Corpora- station” placed a certain distance above the tion (PanAmSat), the third largest, for $25 Earth would have an orbital frequency of per share in cash, or $3.2 billion. The merger, 24 hours, and, therefore, would constantly if approved by regulators, would result in be situated over the same point of the a combined fleet of 53 serving terrestrial globe. With appropriate equip- customers in more than 220 countries and ment, such a station “could act as a repeater territories.1 It would be another major step to relay transmissions between any two toward consolidation in an industry recently points on the hemisphere beneath, using any challenged by overcapacity problems and frequency which will penetrate the iono- intermodal competition from transoceanic sphere.”2 cable companies. The merger also would bring an ironic end to the longstanding (if Sixteen years later, President John F. Ken- recently diminished) rivalry between Intelsat, nedy called on the to lead an the one-time government-owned monopoly international effort to develop and operate provider of international satellite services, the world’s first global satellite communi- and its upstart, privately owned competitor cations system. The soon wilmerhale.com PanAmSat. followed with a resolution similarly support- ing establishment of a satellite system for Baltimore The Origins of the Commercial all nations. Eleven countries (including the United States) responded in 1964 by creat- Beijing Satellite Industry ing the International Berlin Today’s extensive network of geostation- Satellite Consortium (INTELSAT), in which Boston ary satellites, providing coverage literally to they agreed to participate through public or the ends of the earth, had its origins in the private telecommunications entities known as Brussels seminal 1945 article by British physicist and “signatories.” In 1965, INTELSAT launched its London science fiction writer Arthur C. Clarke, Extra- first satellite, Early Bird (INTELSAT series I).3 Munich

New York 1. Press Release, Intelsat and PanAmSat to Merge, Creating World-Class Communication Solutions Northern Provider, Aug. 29, 2005, available at http://www.intelsat.com/press/release_details.aspx?year=2005& art=20050829_01_EN.xml&lang=en&footer=7 (“Press Release”). Oxford 2. Arthur C. Clarke, Extra Terrestrial Relays, World, Oct. 1945, at 306, available at http:// Palo Alto www.sciencemuseum.org.uk/on-line/clarke/ww3.asp.

Waltham 3. See Making History, available at http://www.intelsat.com/aboutus/ourhistory/yr1960s.aspx; Charles H. Kennedy & M. Veronica Pastor, An Introduction to International Telecommunications Law 65-67, 74 (1996); Washington Kenneth Katkin, Cable Open Access and Direct Access to INTELSAT, 53 Case W. Res. L. Rev. 77, 87-91 (2002). INTELSAT was founded on the premise international satellite.5 In 1985, the Federal that international satellite telecommunica- Communications Commission (FCC) tions are a quintessential natural govern- granted PanAmSat and other companies ment monopoly—in part because they have authority to establish international satellite high fixed costs compared to low marginal systems separate from INTELSAT, after costs of providing service once a facility the Reagan administration declared has been built.4 The founding agreements that they were required in the national allowed INTELSAT to authorize other interest.6 In 1988, PanAmSat launched satellite systems, but only if the proponent the PAS-1 Atlantic Ocean Region satellite, demonstrated that the new entrant would the first US private-sector satellite to cause no technical or economic harm to provide international satellite services.7 In 1988, PanAmSat INTELSAT. Until 1985, US regulators did not To ensure that separate operators did not launched the PAS-1 allow separate satellite systems to provide international communications services to or harm INTELSAT economically, the FCC at Atlantic Ocean Region from the United States. The United States first imposed restrictions, including, among satellite, the first US signatory to INTELSAT was the govern- others, a prohibition on separate systems’ interconnection with the public switched private-sector satellite ment-created, privately owned corporation known as COMSAT, which enjoyed the ex- telephone network. But challenges by to provide international clusive right to provide INTELSAT transmis- new entrants chipped away at these sion capacity in the United States. limits. In 1990, PanAmSat (opposed by satellite services. COMSAT) urged the FCC to dismantle In 1979, in a parallel development, a group them further, prompting yet another of nations and signatories formed the extensive review of the industry by the International Maritime Satellite Organization Executive Branch. In 1992, heeding the ()—modeled on INTELSAT—to Executive Branch’s recommendations, the develop and operate a global maritime FCC authorized separate satellite systems satellite telecommunications system. COM- to offer international private-line circuits SAT similarly enjoyed an exclusive franchise interconnected to the public switched to provide Inmarsat transmission capacity network, and ordered all restrictions on for communications between ships on the interconnection to be eliminated by 1997.8 ocean and the United States. The rest of the decade witnessed steadily Competition Emerges increasing satellite competition. Soon after its acquisition by Hughes Electronics The natural monopoly model for Corporation in 1996, PanAmSat international satellite communications could boast a fleet of 14 satellites.9 lost favor in the United States in the By 1999, of the over 200 commercial 1980s, just as it lost favor in other areas geosynchronous satellites that orbited of telecommunications. In 1984, Rene the earth, only 17 belonged to INTELSAT. Anselmo founded PanAmSat and Also, INTELSAT owned just 13 of launched the world’s first privately owned the 73 serving the United States.10

4. See Kennedy & Pastor, supra note 3 at 79; Katkin, supra note 3 at 84-85. 5. See Brief History of PanAmSat, available at http://www.panamsat.com/company/timeline.asp. 6. See Report and Order, Establishment of Satellite Systems Providing International Communications, 101 F.C.C. 2d 1046 ¶¶ 1, 5 (1985); Kennedy & Pastor, supra note 3 at 88; Katkin, supra note 3 at 101-02. 7. See Brief History of PanAmSat, available at http://www.panamsat.com/company/timeline.asp; Katkin, supra note 3 at 101-102. 8. Order, Permissible Services of US Licensed International Systems Separate From the International Telecommunications Satellite Organization (Intelsat), 7 FCC Rcd 2313 ¶¶ 5-6 (1992); Kennedy & Pastor, supra note 3 at 89-90. 9. Brief History of PanAmSat, available at http://www.panamsat.com/company/timeline.asp. 10. See Katkin, supra note 3 at 101-02. 2 Meanwhile, the entire satellite industry, Reorganization for the Betterment of including INTELSAT, had to contend International Telecommunications Act with intermodal competition. In 1988, (ORBIT Act),13 requiring pro-competitive as PanAmSat launched the PAS-1, privatizations of INTELSAT and its AT&T Corp. completed the world’s maritime clone Inmarsat. The United first transoceanic fiber-optic cable, the States, of course, could not unilaterally TAT-8, which ran 3,000 miles from New transform these treaty-based organizations. Jersey to Great Britain and offered But the ORBIT Act provided strong capacity comparable to that offered by incentives, by prohibiting INTELSAT and satellites. The first trans-Pacific fiber- Inmarsat from providing new US services optic cable entered service in 1991.11 until they privatized in accordance with By 1999, submarine fiber optic cables the Act. The ORBIT Act also removed provided about three times the number prior statutory ownership requirements of US international transmission circuits for COMSAT, allowing Lockheed Martin With competition delivered by all satellites—including to buy control of the company. INTELSAT’s—combined.12 flourishing in international The privatizations succeeded. INTELSAT, Non-geostationary satellites—those which had grown to 144 member communications, positioned in lower-earth and middle- governments, converted to the Bermuda- the rationale for earth orbit systems—provide additional based stock corporation Intelsat, Ltd., INTELSAT’s status as competition, but focus on mobile which was subsequently acquired by a satellite services (as Inmarsat does) group.14 The FCC then an intergovernmental rather than the fixed services targeted found that Intelsat had complied with organization dissolved. by INTELSAT. Moreover, the leading all of the privatization criteria set forth ventures—Iridium, , and in the ORBIT Act (as amended).15 ICO—by 2000 found themselves in bankruptcy or other financial difficulty, due Other private equity deals also have in large part to the ubiquity of terrestrial rippled through the industry, harbingering wireless. Those companies have re- consolidation. In 2003 and 2004, emerged, serving narrower markets and investment firms or groups acquired migrating toward geostationary satellites Inmarsat, PanAmSat, and New Skies, a themselves. Their services saw heavy Dutch operator created by the spinoff of use in areas hit by natural disasters such certain Intelsat assets. Moreover, Intelsat as the recent Gulf Coast hurricanes. in 2004 acquired a large portion of Loral’s domestic satellite fleet and related Privatization and Consolidation customer contracts, providing entry into the North American video and corporate With competition flourishing in data markets. Shortly before announcing international communications, the its planned purchase of PanAmSat, Intelsat rationale for INTELSAT’s status as an was rumored to be negotiating for the intergovernmental organization dissolved. purchase of New Skies, further reflecting In March 2000, Congress enacted analyst sentiment “‘that the [fixed satellite the comprehensive Open-Market service] industry has the potential for

11. See id. at 102-03. 12. See id. at 130-31. 13. Open-Market Reorganization for the Betterment of International Telecommunications Act, Pub. L. No. 106-180 § 641(a), 114 Stat. 48, 55 (2000). 14. See Our History 2000 And Beyond, available at http://www.intelsat.com/aboutus/ourhistory/ yr2000s.aspx; Memorandum Opinion and Order, Petition for Declaratory Ruling that Intelsat, Ltd. Complies With Section 621(5)(F) of the ORBIT Act, 20 FCC Rcd 8604 ¶ 7 (2005) (“April 2005 Intelsat Order”); Katkin, supra note 3 at 90-91 & n.56. 15. April 2005 Intelsat Order ¶ 14. 3 This letter is for general informational purposes only and does not represent our legal advice as to any particular set of facts, nor does this letter represent any undertaking to keep recipients advised as to all 16 relevant legal developments. consolidation . . . .’” PanAmSat, having segments of the Fixed Satellite Service 20 Wilmer Cutler Pickering Hale and Dorr LLP is been bought in 2004 by a consortium of industry post-merger. That same a Delaware limited liability partnership. Our private equity firms led by Kohlberg Kravis report, however, acknowledged that it UK offices are operated under a separate & Roberts, went public earlier in 2005. was unclear how regulators would define Delaware limited liability partnership. the relevant markets to be examined. © 2005 Wilmer Cutler Pickering Hale and Dorr LLP Prospects for the Merger Intelsat and PanAmSat officials, meanwhile, The proposed Intelsat-PanAmSat merger maintain that the deal should not raise is subject to Hart-Scott-Rodino review antitrust concerns because the firms’ (likely by the US Department of Justice), respective businesses and clients are FCC approval of the necessary license “complementary”: Intelsat focuses on core transfers, and possibly review by the telephony and advanced data services European Commission. If approved, the while PanAmSat has built a strong, video- merger would leave at least two other centric business.21 Company officials large industry players, namely SES Global also emphasize increasing intermodal and , and numerous smaller competition from terrestrial sources.22 national and/or regional operators such That said, the merger agreement requires as New Skies and Loral . According consummation of the deal so long as Intelsat to an early Citigroup analyst report, is not required to divest more than three smaller operators outside the “top four” revenue-producing IA series satellites (SES, Intelsat, PanAmSat and EutelSat) (purchased from Loral). But analysts remain presently have a combined market share skeptical that even this limited divestiture (measured in revenues) of almost 36 should be required, because it would only percent.17 The merger reportedly would weaken the combined company against give the combined company the same SES, a vigorous video competitor.23 And number of satellites over the United States according to a White Paper by the Futron as SES, but more overall capacity.18 consulting company, notwithstanding the merger, in some areas “the large number Analysts’ views about whether the merger of ‘independent’ operators” would will go forward are mixed. Citigroup “maintain[] a competitive environment,” opined that it was “highly unlikely” that thereby “demonstrat[ing] that there is European or US regulators would still room for further consolidation on allow the deal to go through based either a regional or global basis, without on potential antitrust concerns.19 In the satellite industry being reduced to support of this view, Citigroup noted a monopoly or even a duopoly.”24 elevated Herfindahl-Hirshman indices COMMUNICATIONS (HHI) for the Government and Network LAW UPDATE If you have any questions or need 16. Orbiting Wall Street, Mobile Satellite News, Aug. 22, 2005 (quoting Vijay Jayant, Lehman Brothers additional information, please contact: Research Report, Aug. 19, 2005). William T. Lake 17. Jason Bazinet, et al., Citigroup Small/Mid-Cap Research: PanAmSat Holding Corp (PA), Aug. 30, 2005 202 663 6725 (“Citigroup Report”). [email protected] 18. Intelsat/PanAmSat Deal Would Go Through Minus 3 IA Satellites, Communications Daily (Sept. 6, 2005). John H. Harwood II 202 663 6333 19. Citigroup Report at 2. [email protected] 20. Id. at 2-3. David S. Mendel 21. See Press Release, supra note 1. 202 663 6128 22. Intelsat,PanAmSat Announce Intent to Merge, Communications Daily (Aug. 30, 2005). [email protected] 23. Intelsat/PanAmSat Deal Would Go Through Minus 3 IA Satellites, Communications Daily (Sept. 6, 2005). 24. What’s Up With Satellite Consolidation, Futron White Paper, Sept. 2005, available at http://www. futron.com/pdf/SatelliteConsolidation.pdf. WILMER CUTLER PICKERING HALE AND DORR LLP 4