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Globecomm’s Strategic Movements Concerning Carrier Telecom BV And Evolution Communication Ltd.
Globecomm Systems Inc., a leading global provider of satellite-based communications infrastructure solutions and services, informed that the Company has acquired Carrier to Carrier Telecom BV (C2C) and the assets of Evolution Communication Ltd. (Evocomm) from Carrier to Carrier Telecomm Holdings Ltd (C2C Holdings).
The initial purchase price is approximately $15 million in cash, funded through $2.5 million of Globecomm’s current cash position and approximately $12.5 million through the Company’s existing credit facility with Citibank. C2C Holdings may also receive up to $10.9 million of additional cash consideration, through a two-year earn-out, based on reaching certain earnings milestones. Arcadia Securities, LLC acted as financial advisor to Globecomm on this transaction and Kramer Levin Naftalis & Frankel delivered legal advice.
C2C, based in the Netherlands, delivers satellite services across Africa, the Middle East, Europe and Asia, and maritime services in the Atlantic, Mediterranean, Gulf of Mexico and the Indian Ocean regions through its robust teleport facility located in Biddinghuizen, Netherlands. Evocomm’s wholly owned subsidiary, Evosat SA Pty Ltd, is headquartered in Cape Town, South Africa and maintains an office in Johannesburg. Evosat and Evocomm primarily provide Inmarsat land-based BGAN and maritime-based Fleet Broadband services, along with mobile communications through C2C.
The combined companies had audited revenues of approximately $19.5 million for the year ended December 31, 2009. The companies have a high concentration of recurring managed service revenues across multiple vertical markets in which Globecomm operates, including Maritime, Enterprise and Government. The transaction is anticipated to be accretive to Globecomm’s fully diluted earnings for its fiscal year ending June 30, 2010, including the impact of amortization of intangibles relating to the transaction, and excluding the non-recurring charge for acquisition costs.
Pursuant to a change in accounting principles relating to buy accounting for acquisitions, which was effective with respect to Globecomm on July 1, 2009, Globecomm anticipates a non-recurring charge to earnings of approximately $0.03-$0.04 per share in the Company’s third quarter earnings ending March 31, 2010 relating to acquisition costs.
David Hershberg, Chairman and CEO of Globecomm, informed, “With this acquisition, Globecomm continues to execute on its long term plan of building the industry’s finest end-to-end managed services company. The natural cultural fit of the engineering talent of C2C, Evocomm and Evosat, coupled with a robust teleport in Biddinghuizen, Netherlands were the primary factors in our decision to move forward with this transaction. Pier du Plessis, CEO of C2C, and Harry Tayler, Managing Director of Evosat, both share very similar philosophies to Globecomm as it relates to the high value added experience we deliver to our customers. Globecomm believes that both of them will be a natural fit in working with the executive management team of the Company as we execute on our combined vision. Furthermore, this transaction broadens the Company’s continued growth of higher margin recurring service revenues, which have been critical in providing greater financial stability, predictability and visibility as the organization navigates the current economic downturn. I would like to welcome Pier, Harry and the entire staffs of C2C, Evocom and Evosat to the Globecomm family.”
Pier du Plessis, CEO of C2C, informed, “This partnership takes C2C to the next level as it becomes a major player in the provisioning of fixed and mobile satellite networks as well as terrestrial networks. The combined group network infrastructure and unsurpassable technical expertise will prove to be the competitive edge in going forward.” Harry Tayler, Managing Director of Evosat, continued, “Joining forces with Globecomm creates excellent opportunities for Evosat and provides the platform needed to take the business to the next level of global mobile Internet Protocol (IP) offerings. Globecomm’s market-leading IP infrastructure will facilitate Evosat’s entry into several new market sectors and we look forward to expediting the anticipated revenue and earnings growth that this will bring.”
Keith Hall, President and COO added, “The acquisition of C2C will vastly expand the Globecomm footprint on both sides of the Atlantic and beyond. C2C will provide Globecomm with a permanent foothold in Europe to service customers in its traditional as well as new markets in North America, Europe, the Middle East, Africa and South East Asia. I look forward to working closely with Pier and Harry as we continue to execute on our Global Managed Services vision.”
About Globecomm Systems
Globecomm Systems Inc. provides end-to-end value-added satellite-based communication products, services and solutions by leveraging its core satellite ground segment systems and network capabilities, with its satellite communication services capabilities. The products and services Globecomm offers include pre-engineered systems, systems design and integration services, managed network services and life cycle support services. Globecomm’s customers include communications service providers, commercial enterprises, broadcast and other media and content providers and government and government-related entities.
Based in Hauppauge, New York, Globecomm Systems also maintains offices in Washington, DC, Maryland, New Jersey, the Netherlands, Hong Kong, Germany, Singapore, the United Arab Emirates and Afghanistan.
This press release contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward looking statements are based on management’s current expectations and observations. You should not place undue reliance on our forward-looking statements because the matters they describe are subject to certain risks, uncertainties and assumptions that are difficult to predict. Our forward-looking statements are based on the information currently available to us and speak only as of the date of this press release. Over time, our actual results, performance or achievements may differ from those expressed or implied by our forward-looking statements, and such differences might be significant and materially adverse to our security holders. In particular, there are numerous risks associated with acquisitions, including integration risks, management turnover, the acquired companies being unable to achieve their anticipated results of operations, distraction of senior Company management and risks of significant international operations.
We have identified some of the important factors that could cause future events to differ from our current expectations and they are described in our most recent Annual Report on Form 10-K and most recent Quarterly Report of Form 10-Q, including without limitation under the captions ”Risk Factors” and ”Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and in other documents that we may file with the SEC, all of which you should review carefully. Please consider our forward-looking statements in light of those risks as you read this press release.
DOD's reliance on commercial satellites hits new zenith
The U.S. military is increasingly turning to the private sector for many of the services it relies on. After the supply of energy and terrestrial fiber communications, satellite communications is the top capability that the U.S. military relies on the private sector to deliver.
Industry experts estimate that 80 percent of all satellite bandwidth that the Defense Department uses is purchased by the Defense Information Systems Agency from companies such as Inmarsat, Intelsat and Iridium. That percentage is expected to climb north of 90 percent in the near future as unmanned aerial vehicles and other intelligence, surveillance and reconnaissance (ISR) systems begin transmitting in high definition, which will require even more bandwidth.
New satellite constellations, such as the Mobile User Objective System (MUOS), are expected to take up some of the slack. However, the need for supplemental bandwidth is expected to continue growing during the time that the five MUOS satellites are put into orbit between 2010 and 2015.
DOD leaders might have legitimate concerns about the department’s dependence on the private sector for such a vital tactical capability. However, it’s a burden the military is perfectly happy to place on the shoulders of industry.
“At the end of the day, it’s a great thing,” said Gen. James Cartwright, vice chairman of the Joint Chiefs of Staff, responding to a question about whether the military’s dependence on commercial bandwidth is good, bad or unimportant.
“As we move to more exquisite sensors, the demand for high-definition video is substantially greater, so we have to move to mediums and compression algorithms that will allow us to do that,” he said after remarks he made during an AFCEA International conference in San Diego in February. “The good news is that the industry is leading that. I don’t have to go invent it.”
The military gains another advantage because private companies constantly update and refresh their satellites to stay competitive in the commercial market, Cartwright said. Using private-sector bandwidth breaks the DOD satellite procurement cycles that regularly stretch out over a decade.
Narrowband to the Foxhole
Even with the recent launches of three Wideband Global Satcom satellites, colloquially known as the gap filler satellites, DOD’s system of satellites is made up mostly of aged and degrading ultra-high-frequency satellites, operated under a variety of military satellite communications (milsatcom) programs, such as the UHF Follow-On (UFO) satellite network. Although the WGS satellites close some of the gap between warfighter needs and deficiencies, they are designed mostly to be the big pipes through which combatant commanders bring forth ISR capabilities. However, they don’t play much of a role in providing situational awareness to warfighters in the field.
As a result, the shortfall in bandwidth is felt most urgently by troops who are highly mobile and don’t have the luxury to access a fiber-optic network or large, stationary satellite terminals. The requirement for narrowband to the foxhole outstrips the capabilities and available throughput of DOD’s UHF satellite network.
“Tactical communications in narrowband is one of the areas that is so significantly broken right now,” said Rebecca Cowen-Hirsch, president of Inmarsat Government Services, who, before joining Inmarsat in late 2008, was program executive officer for DISA’s PEO-Satcom, Teleport and Services (PEO-STS).
“For every one request for UHF capacity [that's accepted], five are denied,” she said. “Milsatcom is 500 percent oversubscribed. Communications on these narrowband frequencies are crucial to life or death, but the DOD is having significant difficulties maintaining this capacity because the UHF constellation on orbit today is fading.”
DOD is building the MUOS network of satellites to address that need for delivering narrowband, beyond-line-of-site connectivity at speeds of 64 kilobits/sec or slower to the foxhole through devices such as the handheld radios in development under the Joint Tactical Radio System program. But the first of four MUOS satellites — plus one on-orbit spare — is not scheduled for launch until later this year, and DOD does not expect to reach full operational capability until 2014. Meanwhile, the growing need for narrowband communications — especially as operations in Afghanistan continue to escalate — will go largely unfilled.
And even then, “not to take away from what MUOS will provide — because it is a fantastic capability when it comes on orbit — but when it does go on orbit, its third-generation capability will not yet be able to be accessed because the terminals are behind” schedule, Cowen-Hirsh said.
The commercial satellite industry has grown significantly in recent years by bridging many of the military’s satellite communications gaps, notably by providing a variety of portable broadband global-area network (BGAN) terminals that can access Inmarsat’s I4 network of satellites.
For instance, at the AFCEA West conference and trade show, at least a dozen companies displayed BGAN solutions, including Harris, Hughes, EMS Technologies, Addvalue Technologies and Thrane & Thrane, that give warfighters encrypted and secure access to the Global Information Grid as a complement to existing UHF capability.
“The biggest single problem that the DOD has is that it doesn’t have enough bandwidth, which is a bad thing because we’re fighting wars on two fronts,” said William Beamish, director of product line management for Harris’ Falcon III Manpack radios, which interface with BGAN terminals. The radios provide data rates of 432 kilobits/sec for land portable communications and 492 kilobits/sec for on-the-move/at-the-quick-halt land mobile communications via Inmarsat satellites.
BGAN services are used primarily for IP-based data connectivity for e-mail, Internet and virtual private network access, though it also supports simultaneous voice capability. Besides connectivity, the main value of the BGAN capabilities is that the land-portable terminals are no larger than the ruggedized laptops they plug in to. Similarly, vehicle-mounted land-mobile BGAN terminals for on-the-move communications are half the size of the rooftop terminals in development as part of the Warfighter Information Network-Tactical program.
If BGAN technology survives after the introduction of new satellite networks such as WGS and MUOS, industry experts believe it will be because of the small size of the terminals.
“X-band comms-on-the-move units are as large as one-yard cubed, and they need to be installed on something the size of a pickup truck,” Beamish said. “For that reason, we expect that BGAN will continue to be a viable service for a time.”
Vital yet Ad Hoc
Part of the challenge to closing the communications gap stems from the ad hoc way the military buys commercial satellite bandwidth.
The military typically buys satellite bandwidth in one of two ways. One way involves procuring an IP network in which users pay for the bandwidth they use. The other way is to lease bandwidth so that users are assigned dedicated bandwidth in which capacity is exclusively theirs to use.
Either way, the military acquires most of its bandwidth from the private sector on an ad hoc basis. Industry estimates suggest that more than 95 percent of the commercial bandwidth acquired is paid for via supplemental funding, instead of being a line item in each service’s annual budget.
The Navy is the only service that funds and has budget line authority for commercial satellite communications. That’s because Navy officials recognized a long time ago that being disconnected while operating at sea would make it harder to compete for milsatcom. As a result, the Navy saw the value of turning to commercial satellite communications and made the strategic decision to budget for it.
Commercial satellite communications providers welcome the business they receive from DOD. However, industry executives say they believe they could better serve the military through upgrades and development of new capacity if their businesses had some cost assurance.
“The commercial satellite capability that we’re providing the military user is not something that is intentionally planned for by the DOD,” Cowen-Hirsch said. “Commercial satcom was originally viewed as an augmentation. Now it is an integrated capability. And yet from programmatic and funding standpoints, the DOD has not put a framework around it as such that when users, especially those in the tactical communications environment, deploy on their missions, they have no absolute assurance that someone’s going to take care of all the necessary capability requirements, whether it is military or commercial satellite communications.”
“Going forward, that is really not a winning proposition in that commercial satcom is not an integrated part of the architecture, is not funded intentionally and doesn’t happen with forethought to ensure that it is there,” she said. “We want to make sure that there is a sufficient business case for the investment we make to meet the requirements of the user base … and the warfighter.”
That’s a message that seems to be getting through to the military based on changes in DOD vernacular, which has evolved from calling satellite communications a surge capacity after the 2001 terrorist attacks to calling it an augmentation and now referring to it as integral.
It’s now common to hear conversations center around commercial satellite communications as a core capability, as Cartwright describes it. Such a change in philosophy is not a surprise after Central Command officers, such as former Brig. Gen. Mark Bowman, have publicly said 96 percent of satellite communications in the Centcom area of responsibility comes from the commercial sector while only 4 percent comes from Milsatcom.
“The DOD is coming to the realization now that as they become more dependent on commercial services that perhaps they need to work closer with the commercial industry to ensure that their requirements are met by commercial systems,” said J.J. Shaw, director of North American and global naval programs at Inmarsat. Shaw is a former Navy commander who managed the Navy’s Challenge Athena program to acquire commercial satellite communications services for carrier battle groups. “For instance, if Inmarsat were to build a satellite system, the DOD would like to make sure we’re using encrypted telemetry, tracking and control so we have positive control of our satellites.”
“The paradigm has shifted from commercial satcom being surge augmentation to being core,” Shaw said. “It has changed [the military’s] perspective to the point where they realize they need to work with the commercial industry to ensure that their requirements are met.”
One of those requirements would be make satellite terminals more mobile so warfighters could carry them in briefcases or backpacks. Another would be to embed communications deeper into the force structure.
Using the Navy as an example, satellite services during the past 15 years have been primarily the purview of surface vessels, such as guided missile destroyers. Most recently, satellite communications capabilities are being integrated into lower tactical echelons, such as patrol boats. The next step will be to embed that capability into the subtactical level in things like unattended sensors on buoys for the Navy and unattended ground sensors for the Army.
DISA and GSA Step In
In the short term, all eyes in the commercial satellite communications industry will be on the Future Comsatcom Services Acquisition (FCSA) contract, a joint effort by DISA and the General Services Administration through which they will buy all commercial satellite communications services and capabilities for the next decade under a common marketplace. Under FCSA, DISA and GSA expect to spend $5 billion for satellite services in any commercially available commercial satellite communications frequency band, including L, S, C, X, Ku, extended Ku, Ka and UHF.
FCSA is the follow-on contract to the contract vehicle that is used to procure commercial satellite communications, which is called the Defense Information System Network (DISN) Satellite Transmission Service-Global (DSTS-G) contract. It went into effect in February 2001 and will expire in February 2011.
Under DSTS-G, three companies — CapRock Communications, DRS Technologies and Artel — won the rights to obtain global fixed satellite service bandwidth and related business and enterprise satellite-based services and applications. Those three companies in turn then go to the marketplace to seek satellite bandwidth from companies such as Intelsat.
With FCSA, satellite communications companies want access to DOD contracts without needing to go through one of those three companies.
“One of our critical initiatives is to get access to FCSA so we can continue to serve DOD with the types of products and services that they need,” said Britt Lewis, vice president of business strategy at Intelsat.
FCSA will address three broad categories of commercial satellite communications access. The first is the procurement of conventional satellite bandwidth. The second is known as subscription services, in which a user buys or leases a satellite terminal and can then purchase satellite services through a distributor. The third is end-to-end services, in which a customer defines requirements and a vendor identifies everything from the satellite, teleport and terrestrial connectivity to the antennas, installation/operation/maintenance of the network, and monitoring and control for situational awareness.
However, FCSA represents a short-term acquisition fix to what many believe needs to be a more explicit strategic commitment by DOD to the commercial satellite communications industry upon which the military relies.
defensesystems.com