Satélites Mexicanos (Satmex) is another example of a privatisation gone wrong. In 1997, the government sold 75% of the state satellite company, Satmex, to a US satellite manufacturer, Loral Space and Communciations, and Principia, essentially a start-up backed by the Autrey family, which had made its name from its eponymous store chain.
The bidders overpaid wildly for Satmex: they offered US$500m, which was double what the government was expecting.
At the time of privatisation, Satmex had a monopoly of the satellite communications business in Mexico and three satellites. Satmex lost its monopoly in 2001 and has been haemorrhaging clients ever since. Now it has 10 other competitors and its market share is, probably, scarcely 50%. The arrival of Intelsat into the North American market is likely to make Satmex's life even more difficult.
The likely result of the problems facing the company is that the Mexican taxpayer will end up bailing out the company. There may be good reasons for doing this, but these reasons, arguably, should have precluded the privatisation.
The main justification for a bailout is that the satellite communication business will remain a lynchpin of the communications industry. Telecoms companies as well as broadcasters depend on satellites. So, long-term, the industry is a strategic one, and one in which Mexico should have a stake.
The Mexican government itself has reserved 7% of Satmex's capacity for its own exclusive use.
The problem is that the telecoms and high tech bust has left the satellite industry with vast overcapacity. Only four orders for commercial satellites have been placed this year. Although satellite manufacturers talk bravely of 300 new satellites being needed by 2007, this forecast seems to be based on some fiercely optimistic views of how the world economy will grow in the meantime.
Current position. Satmex is the classic case of a company operating in a difficult market with weak shareholders and a feeble capital structure. The company's debts are threatening to overwhelm it.
The deeply indebted company has to launch its new satellite, Satmex 6, to generate the revenues it needs to survive. Although the company claims that it has enough cash to see itself through to the launch, outsiders have major doubts.
These doubts were compounded in mid-July when Loral Space announced that it was filing for Chapter 11 bankruptcy in the US. Loral Space has 50% of the shares in Satmex but only 49% of the votes. The other two shareholders are Principia (which has 26% and is linked to the Autrey family) and the Mexican government (25%). The Autrey family made its money in retailing, through Casa Autrey.
Loral. Loral Space applied for Chapter 11 in order to sort out its debts, without creditors complicating matters, following its much trailed decision to sell its crown jewels, its six North American satellites (four of which are operational), to Intelsat, which is now the world's dominant satellite company. Loral says Intesat is paying US$1.1bn in cash. (Intelsat says that it is paying US$1bn.).
The deal will mean that Loral Space will be left with five other satellites, plus its satellite manufacturing business and various other businesses, such as its stake in Satmex.
As part of its deal, Intelsat has ordered a small (US$100m) satellite from Loral. This deal would seem to have sorted out Loral's problems. Its debt was only US$959m.
Loral admitted that it had been overgeared for some time and that it misjudged the effect that the telecoms bust would have on its business. It also tried to integrate vertically, building a substantial stake in Globalstar, one of the main users of satellite communications. This company is emerging from Chapter 11. Loral will have a residual 5% to 6% stake in it.
Sky. Satmex's problems are directly linked to the loss of its major customer, Sky. The media group accounted for 20% of the company's total sales.
As a result of this lost business, Satmex has pruned its overheads. The company has announced plans to lay off 45 staff, 21% of its total headcount.
The company is already having to scrimp and scrape to remain reasonably current on its borrowings. The pressure it is under prompted Standard & Poor's to put the company firmly in the speculative investment category CCC+.
Crunch. The crunch for Satmex comes next year when most of its US$525m debt falls due. It has to repay US$205m in floating rate debt, US$203m in bonds and a good chunk of the US$170m in liabilities it has with the Mexican government. This is a legacy of the company's privatisation in 1997.
Under the terms of the deal, if the company fails to clear the liabilities it has to pay a fine equivalent to a further 10% of the liabilities. With interest payments, the company is due to pay out US$600m.
With one launch. The company does have an escape hatch. It has lined up loans from the US Eximbank and the European export promotion agency, Coface, worth US$226m. This would enable the company to launch Satmex 6 and go some way to generating the revenues it needs to sort out its balance sheet.
Although both export credit agencies have agreed to make the loan, they do not want to be alone in ensuring that Satmex has a future. They said that they would not disburse the loans until the company had clinched a refinancing agreement with its creditors. This was due to happen in July.
The decision by Loral to go into Chapter 11 in the US complicated the relationship with the creditors.
Operations problems. The company has had its share of operational problems. The main one is that its Solidaridad 1 satellite has jumped out of its orbit. This happened in 1999 and meant that the users could not use it.
This problem is why Satmex 6 is so important to the company's future. The US$300m satellite will have a footprint stretching from the US-Canadian border to Chile. The satellite, when it goes up, will account for 60% of Satmex's total sales.
Originally, the satellite should have been launched by the accident-prone Ariadne rocket, in February. The launch date is now scheduled for some time in September. The latest official statement from Satmex is that the satellite will be launched in the second half of this year.
Pressure. In the meantime, the pressure on the company to limp through to the launch means that it has been cutting prices to hang on to business.
This may not be enough. One of the company's key remaining clients is the Mexican government, in its various guises. Until this year, Satmex had a monopoly of the government and state-owned companies satellite communications business.
Not any more. Besides the fed-eral government, state companies such as the Comisión Federal de Electricidad and Petróleos Mexicanos used Satmex for their satellite communications. Satmex has started to lose this business because of the government's new transparent business rules. Under these rules, government contracts cannot be awarded without a public tender.
This requirement has opened the door for rivals such as PanAmSat. At the beginning of this year, PanAmSat landed a contract
Government. If Satmex is to pull through, the Mexican government will have to play a key role. Bancomext, the foreign trade bank, has already offered it US$50m. The government could also rejig the terms under which the US$170m of outstanding liabilities are to be paid.
One idea to be floated was that the government should offer Satmex a tax break equivalent to the amount of its initial overpayment for the company when it was privatised.
This would not cost the government much, since Satmex is unlikely to be generating much in the way of taxable profits in the immediate future. But it would signal that the government was committed to ensuring that the company sur-vived. This would encourage other creditors.
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