Gilat confirmed the exclusive report in "Globes" only a week ago of Microsoft's investment in its satellite Internet venture Gilat to Home. Microsoft invested $50 million in exchange for 26% of shares, while Gilat itself will have the option to receive 35% of company shares.
The company yesterday held a fast financing round in which it raised $350 million in convertible bonds at $186 per bond, with an option to raise another $70 million from issue underwriter, investment house Salomon Smith Barney. Today, the company disclosed its intention to set up a satellite Internet venture for the South American market at the end of the year, and other markets around the world.
The entry into the South American market will be based on a number of customers that Gilat inherited from Spacenet, among them Embratel, a large communications provider in Brazil and Banco Bradesco, a large bank which owns the country's largest Internet provider.
US investment house Goldman Sachs estimates that the Brazilian Internet market is expected to enjoy amazing growth rates, reaching $19 million subscribers in 2003. Since the level of communications infrastructure in South America is lower compared to the US, the market appears ripe for the satellite alternative.
Gilat already has an operating presence in South America through GVT (global village telecom) ventures, which provide satellite telephony services in a number of South American countries. Gilat will exploit this presence to speed up its entry into the market as well as joint offering communications packages.
Gilat's business was always successful. In 1992, its average growth rate was 56%, with a 51% net profit growth. The VSAT equipment and services market share in 1998 was 40%, second only to US company Hughes, which had a 47% market share. Gilat only recently signed a significant agreement to connect all US post offices by satellite.
Gilat's problem was that it became a very dominant player in a market perceived by investors as insignificant. Investors are familiar with cable Internet and ADSL, but not with VSAT.
Gilat understood that the US capital market wants dreams, and that it had the tools with which to supply dreams. Setting up Gilat to Home is a change of image for Gilat.
To date, Gilat focused on the commercial and corporate markets (and still remains far from neglecting them). It is now opening a new market - a satellite broadband consumer market, namely the 30 million households geographically far from the ADSL and cable Internet services, living in remote or hilly regions.
The move attracted wide attention on the part of Wall Street investors, looking avidly for players in the broadband home communications fields. Gilat regarded the move as natural, after management demonstrated its prowess at leveraging its VSAT technology, which facilitates two-way satellite communications for data transmission. Moreover, Gilat to Home is creating a much larger market. How much larger? Take note of the following list: cooperation with RadioShack, a retail chain with wide circulation in the US (including the setting up of 5,000 satellite Internet stations in stores for on-the-spot demonstrations to customers); with Microsoft, provider of MSN access (3.5 million Internet subscribers) and apparently the strongest Internet brand worldwide; and a joint marketing agreement with EchoStar, a DBS satellite television company with 3.4 million subscribers and 20,000 distribution points in the US.
Moreover, as reported exclusively in "Globes", Gilat is negotiating with two other concerns which are expected to invest $150 million in shares plus $150 million in bonds. EchStar is likely to also join in as an investor.
How much is all this worth? Assuming that $4,200 per subscriber is a representative figure, and that Gilat will meet its forecast of amassing a million subscribers in two to three years, plus the several hundred thousand subscribers in South America, Gilat's equity in Gilat to Home USA, and Gilat to Home Latin America will be $2 billion, or $75 a Gilat share. Added to this, of course, is the resulting growth in Gilat sales to Gilat to Home (which will yield high profit margins on reaching critical mass proportions).
"Globes": Yoav Leibovitch, what is going on at Gilat?
Leibovitch: "Lots of good things. We're about to duplicate Gilat to Home USA in South America, although we believe it will have smaller scale growth expectations. We estimate that within two to three years we'll be able to reach hundreds of thousands of subscribers.
"On completion of these two moves, we plan to implement the model in Europe and South East Asia. We intend to make Gilat the global provider for broadband satellite Internet.
"As the supplier of equipment for these ventures, we benefit greatly from economy of scale, as we can sell significant quantities of satellite communications products to a number of Gilat to Home ventures, not only one such venture. Nevertheless, we estimate that the US venture will be the largest."
Why are you forging ahead in several markets simultaneously?
"We're living in the Internet era, and time is an expensive resource. We currently have a major technological advantage over competitors, which accords us an unprecedented window of opportunity, but it will not last long. The window of opportunity derives from the superior quality of our SkyBlaster product. Our idea is to leverage the technology in several continents to conquer as many market shares as possible and beat both the competition and DSL and cable ground alternatives."
Gilat told analysts that gross profits are expected to slide from 40-45% to 33% due to initial subsidization of Gilat to Home modems. What does this mean for investors?
"We had to decide whether to invest dollar in exchange for percentages or look for more sophisticated ways, such as, for example, not investing at all in subsidizing the SkyBlaster. On the one hand, we will slip to 33% gross profit, but on the other, we'll have no operating losses at Gilat to Home."
Your business core was the corporate market. Are you neglecting it?
"Heaven forbid. We are continuing to increase and develop our core business, taking pains to boost sales to this market. Next week, we'll announce a venture called KBC with US financier Michael Milken, who will provide a distance learning and advanced employee training service, Knowledge University.
"Gilat will invest $10 million and Michael Milken $50 million. I believe it's a fascinating venture with an interesting market, which will utilize Gilat's VSAT equipment. That's just in case you thought I had some time to rest."
Published by Israel's Business Arena on 2 March, 2000