The current credit crisis and global recession has pressured satellite industry balance sheets around the world. The question, "Will they run out of cash?" has been asked with increasing frequency about many satellite companies that just months earlier looked forward to seemingly bright futures. While the public equity markets and many sources of debt financing have closed to satellite companies, the market for PIPEs, or Private Investments in Public Equity, offers a potential solution. In fact, the PIPEs market already has been the financial savior of at least one high-profile satellite operator.
Benefits of The PIPEs Market
With PIPEs , public companies can access capital quickly from institutional investors without the costs or delays associated with public offerings. In as little as a few days, a company can meet with potential investors, agree on terms, close the transaction, and receive its funds. When public markets are as difficult as they have been recently, the PIPEs market offers additional allure. Deals can be priced privately without suffering the technical pressure that a public offering would generate. The PIPE securities can be in the form of common equity, preferred equity, convertible debt, or any other security. They also often incorporate warrants to provide investors with their target rate of return.
Warren Buffett – King of the PIPEs
Warren Buffett put PIPEs on the front page in September of 2008 when his Berkshire Hathaway Inc. agreed to invest $5 billion into Goldman Sachs in the form of preferred shares. The preferred shares pay Berkshire a 10% dividend. In addition, Berkshire received warrants for an additional $5 billion of Goldman common shares at a price of $115. This investment immediately boosted confidence in Goldman, pushing its shares up 8.6% when it was announced. While a $5B investment is more than most satellite companies need, a smaller PIPE can engender similar confidence in a smaller company seeking financing. We are currently working with a major investor looking to invest $25-50 million at a time into PIPEs in public media and telecom companies.
A Serious PIPE in the Satellite Industry – Sirius Satellite Radio
The satellite industry saw a life-saving investment in the form of a PIPE: On February 17 this year, Sirius CEO Mel Karmazin announced a 2-phase PIPE with Liberty Media. First, Liberty provided a $280 million term loan to Sirius with a 15% interest rate. Second, Liberty provided a loan of $!50 million and purchased $100 million of existing loans. Upon completion of the second phase, Liberty also received preferred stock convertible into 40% ownership of Sirius.
PIPEs Don’t Have to Be Expensive
The Goldman deal occurred in a time of crisis, and without the Sirius deal, Sirius could have gone into bankruptcy that day. Most PIPEs are done in much less urgent situations, and the terms can be much more favorable than the Goldman or Sirius deal. One healthy satellite company with multiple financing options is currently considering a convertible PIPE financing with interest rates in the single digits.
The PIPE Market – Going Strong in 2009
The PIPE market has gone through a number of cycles. As the market exploded in 2003-2006, PIPEs were funded increasingly by hedge funds and other investment firms formed specifically for the PIPE market. The hedge fund industry’s contraction has limited PIPE capacity. However, my firm is currently working with a number of investors that are actively seeking PIPE opportunities. We expect to see additional PIPEs in small and mid-size companies within the satellite industry in 2009.
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Tom Watts is CEO of Watts Capital Partners, LLC. The firm advises companies in the satellite, telecom, and media industries on mergers & acquisitions, capital raising, and shareholder development. The firm also manages an investment fund and separate accounts. Watts previously held positions in equity research and investment banking at Cowen and Company, Merrill Lynch, and Bear Stearns. He also headed Ascent Communications Advisors, an active participant in satellite industry financing. Watts began his work in the satellite industry at Booz Allen. He can be reached at twatts@watsscapital.com
