PE Deals of the Year
Private equity firm Apollo Global Management LLC's investment in Hughes Communications Inc. was more than a decade in the making, but it collected a handsome return -- among the year's standouts -- from its $2 billion sale to EchoStar Corp. Hughes, which provides satellite broadband services to subscribers with limited options for high-speed wireline service, was sold to Charlie Ergen's satellite technology company EchoStar for $60.72 per share in June.
Apollo's 57% stake translated to a roughly $750 million payout, about a 475% increase in the value of the position when Hughes was spun out of SkyTerra Communications Inc. in February 2006. The firm collected additional proceeds from securities and loans along the way.
Even more compelling, Apollo's successful space odyssey stands in sharp contrast to the recent struggles of Philip Falcone's high-profile investment in wireless startup LightSquared Co. Apollo's stake in Hughes can be traced to a position in predecessor SkyTerra, which also attracted capital from Falcone's Harbinger Capital Partners LLC and became one of the core assets for LightSquared.
Apollo's investment in Hughes dates to 1999, when the New York PE firm acquired preferred stock and warrants for $87 million in what was then an Internet marketing and strategy outfit.
SkyTerra acquired Hughes in a pair of deals with DirecTV Group Inc. from 2004 to 2006. Apollo provided a $100 million loan for the second purchase.
Soon after the purchase closed, SkyTerra spun off Hughes. Apollo paid $68.4 million to increase its holdings in the newly independent Hughes through a rights offering accompanying the 2006 spin. At the time, Apollo's stake was worth close to $160 million.
While it held on to Hughes, Apollo sold its stake in SkyTerra to Harbinger in 2008. Falcone would later combine SkyTerra with other assets to form LightSquared. That business is now in jeopardy. LightSquared has not been able to deploy commercial service because of interference with global positioning systems, and Falcone has acknowledged that bankruptcy is a possibility.
The sale of Hughes to EchoStar has an interesting backstory as well. The acquisition evolved from a September 2010 meeting, according to the company's merger proxy. Apollo principal Andrew Africk, Hughes CEO Pradman Kaul and CFO Grant Barber convened a group of bankers to evaluate alternatives.
Hughes and financial adviser Barclays Capital reached out to nearly 50 candidates. They selected six bidders for due diligence in December 2010. A rival tried to elbow its way into the process, according to the proxy, but could not assuage Hughes' regulatory concerns. EchoStar did not make the first cut, the filing discloses, when the company's offer was deemed "insufficient."
That Ergen's opening bid underwhelmed Apollo and Hughes is not surprising. The satellite mogul is known for his poker acumen and his nose for a discount. Ergen's pay-TV company, Dish Network Corp., launched three acquisitions in 2011, all of bankrupt companies.
EchoStar renewed talks with Hughes in January 2011, however. The company, advised by Wells Fargo Securities LLC, topped three other second-round bids in February.
Amy Yong of Macquarie Group Ltd. valued the Hughes sale at 7.2 times 2011 Ebitda. While ViaSat Inc. trades at 12.8 times, Hughes' valuation was closer to recent satellite deals. In 2009, for instance, ViaSat purchased satellite broadband provider WildBlue Communications Inc. for 6.7 times trailing Ebitda.
Barclays' analysis, included in the proxy, listed valuations of between 6.7 times and 7.5 times Ebitda for the previous year. Applying that multiple to Hughes' 2010 Ebitda would have yielded $40.51 to $48.14 per share, more than $12 below what EchoStar offered.
Although EchoStar may have paid a significant discount to ViaSat's trading multiple, the deal didn't sit well with the market. EchoStar, which trades at 4 times Yong's estimate for 2012 Ebitda, is "misunderstood" by investors, she says.
The fivefold increase in the value of Apollo's stake in Hughes reflects an expansion in the business.
From the 2006 spinout to 2011, Hughes expanded its customer base from about 50,000 subscribers to more than 600,000. Revenue climbed from $800 million in 2005, the year before SkyTerra solidified its position in Hughes, to more than $1 billion in 2010, the last full year before the sale.
Under Apollo, Hughes launched a new satellite and prepared another that should enter service this year. It also advanced "Ka-band technology" for delivering satellite broadband service.
Hughes may have benefited from Apollo's experience as an owner of European satellite giant Intelsat SA from 2004 to 2008. Apollo jointly invested with Apax Partners LLP, Madison Dearborn Partners LLC and Permira.
The difference in outcome with LightSquared may illustrate just how difficult it is for investors to gauge the development of technology alongside trends in broadband marketing and challenging regulatory protocols.
It is, practically speaking, the stuff of rocket science.