Golden Sky Systems Inc., the second-largest distributor of
DirecTV Inc. services in the country, has filed for an initial public offering of stock to
raise $172.5 million, which it would use to acquire other direct-broadcast satellite
properties.
But at least one analyst believes that the IPO could be a
step toward Golden Sky selling out to a bigger peer, Philadelphia-based Pegasus
Communications Corp., the largest reseller of DirecTV service in the nation.
"The question that has to be asked is: Is the IPO the
end or the means?" Lehman Bros. Inc. analyst Robert Berzins said. "Is it the
end, where they go public and get value for their investors that way, or is it a step
toward ultimately selling out to Pegasus? [Golden Sky] clearly needs money to keep on
going. My expectation is that they will sell out to Pegasus on a long-term basis; maybe a
couple of years."
Golden Sky, which has 297,000 subscribers in 55 rural
markets, did not reveal how many shares it plans to offer, nor when the offering will take
place.
In the meantime, the company can take advantage of the
high-flying DBS sector, which has enjoyed a run of near-cable-television proportions.
For example, EchoStar Communications Corp., DirecTV's top
rival, was trading at as low as $17 per share last August, but it was up to about $159
last week.
That kind of deal currency could be helpful on the
acquisition front, and Golden Sky has already identified 110 unconsolidated rural DirecTV
franchisees that could be potential targets. Those franchisees represent about 2.2 million
homes passed and 300,000 subscribers.
"Given that a majority of these markets are currently
owned by rural electric and telephone cooperatives, for which offering DirecTV programming
is an ancillary business, we believe that we can rapidly increase subscriber penetration
and improve operations in our acquired markets," the company wrote in its prospectus.
Berzins said that because telecommunications companies own
the remaining DBS franchisees, selling off those operations would mean stripping DBS
service out of their total-service packages, and convincing them to do that would require
hefty premiums.
"To get these guys, [Golden Sky] would have to pay a
stiff price," he added. "You are going to see some acquisitions made, but the
big acquisitions have already been made."
Golden Sky has been aggressively building its subscriber
base internally and through acquisition. According to a company press release, it added
12,400 DirecTV subscribers in June -- 11,400 through internal growth and 1,000 through
acquisition.
According to the prospectus, Golden Sky has signed letters
of intent to purchase two DBS franchises with a total of 137,000 homes passed and 9,000
subscribers for $28.7 million.
The company is growing at a rapid clip. According to the
prospectus, 1998 pro forma revenue was $87.9 million -- an increase of more than five
times over the previous year. For the first quarter ended March 31, pro forma revenue was
$30.7 million, more than twice the $14.1 million reported in the same period last year.
Pro forma cash-flow losses for 1998 were more than triple
those of the previous year -- $17.8 million in 1998 compared with $5.4 million in 1997.
For the three months ended March 31, pro forma cash-flow losses were $8.5 million compared
with $1.7 million in the same period in 1998.
Net losses also increased significantly in 1998, to $94.4
million from $15.8 million in 1997. For the three-month period, net losses were $30.6
million, more than three times the 1997 loss of $8.3 million.
Although the losses at Golden Sky appear heavy, Berzins
said this was more due to different accounting policies than poor operations.
For example, he added, a cable-television operator that
buys a converter box for $300 to provide service to a customer still owns the box and
writes off the cost as a capital expenditure.
However, a DBS company that pays $300 for a converter and
gives it to the subscriber free-of-charge immediately expenses the cost of the box.
"If you have a cable company that has cash flow of $1
million and a DBS company with cash flow of $1 million, I would much rather have the DBS
company," he said.
Berzins also downplayed pending litigation between the
National Rural Telecommunications Cooperative and DirecTV regarding programming-sales
rights.
The suit stems from DirecTV's acquisition of U.S. Satellite
Broadcasting, which provided most premium services -- like Home Box Office, Showtime and
The Movie Channel -- separately to DirecTV subscribers.
The NRTC -- which has exclusive rights to sell and market
DirecTV programming in rural markets as part of a 1992 investment in DirecTV -- claims
that it should be able to distribute those services now that DirecTV has the rights.
Berzins said most industry analysts do not expect the suit
to actually go to trial, and some sort of settlement will be reached, which could bode
well for DBS-service providers.
"This is a negotiating tactic," he added.
"The NRTC is basically Pegasus and Golden Sky. There is a lot of benefit that can be
gotten out of this, and they will get some of it."
