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24 November 2016

Eutelsat rumored takeover of SES flaky but not ludicrous

There are several points to flag up concerning this week’s rumors that Eutelsat is poised to make a takeover bid for rival satellite fleet operator SES. These factors combined make the rumors seem far-fetched at present, but a deal in the future could prosper the two satellite powerhouses, amid declining video revenues.

The most glaring issue is that the market cap for Luxembourg-based SES currently sits at more than double that of French firm Eutelsat, at $9.6 billion and $4 billion respectively. Furthermore, Eutelsat has racked up more debt with a net total of $4.25 billion, while SES has debt of $3.4 billion. We can therefore conclude straight from the off that SES is in a much safer position than Eutelsat, but that could be exactly why Eutelsat would be keen to make a move of this magnitude – so that it doesn’t find itself in the deepening hole that smaller rival Intelsat is falling down.

A combined Eutelsat-SES entity would carry more than 13,000 channels for distribution across the globe, with 6,000 TV channels broadcast from Eutelsat’s satellite fleet – particularly focusing on expanding services in emerging markets including the Middle East and Africa.

However, not only do satellite services firms such as Intelsat have to compete with newer, more powerful satellites from the likes of rival SES, but also with increasingly more efficient fiber delivery on the ground. While satellites remain extremely valuable commodities, their value depreciates over time, as does their ability to generate revenue in a market with declining prices curves.

Rumors arose during an interview with Luxembourg Deputy Prime Minister Etienne Schneider, speaking on RTL Luxembourg. Schneider openly stated that Eutelsat is indeed interested in SES, but that he is firmly against such a deal. This poses the highest barrier of all for a potential merger, as the Luxembourg state holds a dominant 16.67% stake in SES, meaning it could block a takeover.

Schneider is openly opposed to the relocation of one of Luxembourg’s largest companies, as he told RTL, “I was informed that Eutelsat wanted to merge with SES. This would mean that the headquarters would move to Paris and that the name would disappear. The Luxembourg state would lose at the same time its influence in SES. That’s enough arguments to say no. Eutelsat is not doing so well and we are not going to watch the flagship of our industry move to Paris.”

Eutelsat gets some 60% of its quarterly revenue from delivering video ($238.5 million of $409 million) but this is gradually declining – down 1.8% in the last quarter. It pulled in just $60.4 million last quarter from data services, with the remainder coming from Government and value added services. SES, on the other hand, pulled in 69% of its revenue from video over the last year, up slightly with year-on-year growth of 3.8%.

Schneider clearly believes SES has a greater outlook than Eutelsat, despite declining revenues in its Enterprise and Government business sectors. The Luxembourg Deputy PM either believes SES is somehow immune to the threat of OTT while its rivals may suffer, or he knows something is happening behind the scenes at Eutelsat that is yet to burrow its way to the light of day.

But Eutelsat has made a strong play into broadband, and has leased capacity on the AMOS-6 Ka-band satellite in partnership with Facebook in Africa and has recently commissioned another standalone High Throughput Satellite (HTS) to serve the African market with broadband.

Eutelsat says its Ka-Sat can deliver satellite broadband up to 22Mbps per home and has attracted 190,000 homes in Europe since 2011, and the satellite has the capacity to support up to 1 million broadband customers.

Over the last 12 months, six new platforms have launched or expanded their activities on Eutelsat’s African satellites, many of them free to air. Eutelsat says it has been validating UHD and is now transmitting its first commercial UHD channels in Russia and Europe.

Alternatively, Eutelsat or SES could have snapped up Intelsat for a steal earlier this year, when its market cap stood at just $181 million, this has since risen to $401 million today but is less than half the size it was last year.

The major put off, however, is Intelsat’s seemingly unsustainable debt mountain of more than $15 billion – significantly more than the combined net debt of Eutelsat and SES ($7.6 billion). This is perhaps why Eutelsat is eyeing up a merger with SES as a safer bet than taking on Intelsat, with the burden of having to manage its debt.

We are surprised that a suitable partner in the form of a private equity firm hasn’t swooped in for Intelsat yet, as it might allow the flailing satellite operator to renegotiate debt at lower prices and carry out some major restructuring.

Although Intelsat has an enormous debt pile to tackle, it may seem surprising that it brings in the highest annual revenues of the trio of satellite firms mentioned, recording $2.35 billion last year, compared to SES’ $2.1 billion and Eutelsat’s $1.6 billion, although on a quarterly basis it has just fallen behind (see diagram).

Intelsat also boasts a higher value of assets than its two main rivals with $13.2 billion in total, but it looks to have sold some of these off as its total assets were valued at $16.4 billion earlier this year – either that or the value of its assets have slipped due to depreciation. SES has assets totaling more than $10.5 billion, whereas Eutelsat’s assets stand at $9.4 billion.