Credit Suisse report highlights synergy of hypothetical merger between SES and Intelsat
A new report from Credit Suisse explores opportunities for consolidation among the largest companies in the satellite industry, finding that in the event of HSE and Intelsat merged, it could increase equity value by more than 30%. Credit Suisse shared the “European Satellite: Scaling Up” report with By satellite.
Ben Lyons, satellite equity analyst at Credit Suisse, said in the report that an SES/Intelsat merger “would make economic sense.” He says Credit Suisse thinks that in theory it could make sense to combine SES and Intelsat, as both have a global reach with more potential synergies, and are pursuing medium earth orbit (MEO) strategies.
“On our scenario analysis, a potential combination could generate synergies with an NPV [net present value] of $2.6 billion and, if SES captures half of these synergies, it would imply an increase of approximately more than 30% in equity value. We believe that the consolidation of SES is easier from an economic point of view because OneWeb issue makes consolidation more complex, but not impossible, for Eutelsat,” he says.
Lyons says the obstacle to a deal would be the Luxembourg government’s stake in SES, which gives the government 33% of the voting rights. “We believe this could be overlooked as Intelsat is based in Luxembourg and could give the government voting rights in a larger satellite company. A tailwind for both companies is the roughly $6.5 billion in C-band payments that are due to be received in 2024.”
Neither SES nor Intelsat has commented on such a potential combination, Lyons added.
Consolidation has already begun between the traditional major players in the satellite sector with the viasat and Inmarsat combination. However, Lyons goes further and thinks that the joint Viasat/Inmarsat company could join forces with Echostar. Lyons argues that scale advantages in the U.S. B2C broadband industry could be key to weeding out competition from SpaceXthe Low Earth Orbit (LEO) Starlink alternative, and Amazonthe Kuiper constellation later in the decade.
“Between the two players, in a merger scenario, the combined annual fixed broadband revenues (Hughes + Viasat US Broadband) total approximately $1.7 billion (based on FY21 revenues) and we believe there could be considerable synergies by combining the businesses from both a CapEx and OpEx view. We already have an idea of the possible synergies in the Viasat/Inmarsat agreement which total around 4% of the combined total OpEx and around 15% of the normalized CapEx (ex Viasat-3) with the transaction which should be finalized in H2 22 pending the regulatory approval. he wrote in the report.
Lyons noted that neither Viasat, Inmarsat or Echostar have commented on such a potential combination.
The report certainly offers a lot of food for thought. As Lyons talks about the benefits of a possible SES/Intelsat combination, he says recent momentum could leave Eutelsat and Telesat “As potentially stranded assets as we believe they are not natural merger candidates due to each company’s competing LEO strategies.”
However, Lyons says that Credit Suisse could, however, enter into smaller agreements with regional players such as Hispasat as potentially accretive. “Among existing LEO players (Iridium, Globalstarand Orbcom), we are unsure of the value of consolidation given the interoperability issues with systems and the relatively long-term nature of each system. For example, Iridium says it does not plan to upgrade the network for a decade after upgrading to the NEXT system in 2017,” he adds.
In its latest major report in the satellite industry, Credit Suisse identified a LEO target market of $27 billion, of which about half (about $13 billion) is in the B2C consumer space, with the rest coming from aviation, mobility, government and telecommunications services. Of this amount, Credit Suisse expects LEO to reach approximately $9 billion in annual revenue which is in market segments currently only occupied by traditional operators. However, Lyons notes that we’ve seen some of the major constellations run into issues with launchers (OneWeb) and supply chain delays (Telesat Lightspeed). Despite this, Credit Suisse believes that some of these constellations will continue to be successful.
“We are still waiting for GEO [Geostationary] strengths to remain competitive in most areas of satellite connectivity due to the economics of LEO being significantly more difficult (over $5 billion versus less than $2 billion in GEO for global coverage) but we believe that there will be increasing competition from new LEO entrants,” Lyon says.
Credit Suisse expects further industry consolidation as competition from LEO intensifies, particularly towards the second half of the decade. Lyons sees a shift in GEO technology towards software-defined satellites (SDS) which she believes will provide much more flexibility than previous designs and therefore better asset utilization which improves returns.
“We are now seeing these assets being launched by several companies (Inmarsat, Eutelsat, Intelsat and SES) and, in our opinion, they are able to offer a superior user experience to older assets. We also see NGSO [Non-Geostationary] assets as differentiated as there are limited broadband satellite LEO/MEO options commercially available, which are limited to O3b in the B2B/B2G space and Starlink in the B2C space. These assets will also be more valuable in a consolidation scenario, in our view,” he says.