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4 April 2023

Satellite merger fever approaches climax as Intelsat and SES engage in talks

All the traditional satellite constellation companies are now engaged in mergers at varying stages, following confirmation from SES that it is in discussions with competitor Intelsat, also based in Luxembourg. This would create a combined company approaching $10bn in market capitalization and $4bn annual revenues. SES stresses talks are at early stages, but barring regulatory interference merger is likely to happen as a result of compelling economic drivers, which are likely to trump erstwhile differences between the two over strategy.

This follows an impending $7.3bn acquisition of London based Inmarsat by the Californian headquartered Viasat, pending regulatory sign off, although it has been provisionally cleared in the UK. Meanwhile, Paris-based Eutelsat is in earlier stages of a $3.4bn merger with the UK’s OneWeb, in which it already holds a 22.9% stake.  That would create a company joint-owned by existing shareholders of OneWeb and Eutelsat.

All these moves have indirect ramifications for the terrestrial cellular business partly because satellite is playing an increasing role providing both user access and backhaul in areas of the world poorly served by fixed broadband. Indeed, these satellite constellations are carrying an ever-increasing amount of mobile traffic as part of their overall Networks business, which also includes fixed line transport. Networks are taking over progressively from Direct To Home TV distribution, now accounting for around 50% of all satellite traffic. Yet ironically video accounts for an increasing proportion of total satellite traffic, because more and more of the data carried under the heading of Networks is streaming media.

This trend has been in train for at least five years now, and longer in North America, showing no signs of abating. SES witnessed an increase in overall revenues for 2022 at €1.94bn ($2.1bn), but with direct video down 6% at $1.1bn, compensated by growth in Networks. Within Networks, mobility has become a key driver, up 2% over the year.

The current merger fever among satellites is almost entirely motivated by economics and competitive demands rather than to boost global coverage of the earth’s surface. These companies are sometimes referred to misleadingly as satellite giants when they are actually economic minnows compared with the tech behemoths undercutting them with LEO (Low Earth Orbit) constellations. The traditional players grew up with a much smaller number of GEO satellites at much greater heights positioned to deliver DTH services on behalf of pay TV operators such as Sky and Comcast. The main threats are posed by Elon Musk’s SpaceX as owner of Starlink and Amazon’s Project Kuiper.

The cost of competing has increased steadily for traditional GEO platform providers. Emerging LEO players have deeper pockets to draw on, noting that SES profits were sharply down in 2022 by 40% to $206m, even if this was partly attributed to an increase income tax charge.

A merger between SES and Intelsat has financial appeal for both parties, not least because it would automatically cancel the ongoing litigation between the two companies resulting from the redistribution of C-band spectrum in the USA from satellite to terrestrial operations.

The spat began in July 2020 when SES filed a claim against Intelsat for $1.8 bn in damages, following the latter’s withdrawal from the C-Band Alliance. This pivoted on Intelsat’s alleged breach of an agreement to split evenly with SES proceeds the C-Band Alliance was poised to collect by auctioning C-band spectrum.

Intelsat had changed course in February 2020 after the US Federal Communications Commission (FCC) unveiled its $9.7 bn incentive program under which money would be allocated to C-band operators individually if they cleared enough of the spectrum by December 2023. Intelsat was eligible for $4.87 bn under this program, while SES was limited to a maximum of $3.97 bn. This resulting uneven division of the spoils between the two satellite fleet operators spiked the SES litigation.

But now the $3.7bn Intelsat is about to obtain from C-band payments becomes a sweetener for the merger deal, while there would also be substantial capex and opex savings.

On the strategy front there are differences to be resolved, notably weaknesses on the Intelsat side, with less investment in non-GEO satellites and even poorer direct video performance. But it could be argued that Intelsat is therefore further along the curve towards rebalancing revenues away from traditional pay TV distribution.

A more significant hurdle could be antitrust action in the USA where it so happens there is less competition, at least at the GEO level. But the defense would be that there will be plenty of new competition from the LEO providers in the markets of the future. In Europe there is healthy competition anyway from Eutelsat, Telenor, and Arabsat among others.

Four of the five European satellite fleet operators have been struggling to compensate for declining direct video business over the last decade, with revenues flatlining at best and decreasing in real terms. SES revenues are up slightly from $1.86bn in 2013 to $1.94bn in 2022, but that is down in real money. Eutelsat is down from $1.28bn to $1,2bn over that period, while Intelsat slumped from $2.6bn in 2013 to $2.02bn in 2021, its latest full year results to date.

Among this European group only the UK’s Inmarsat has grown over that period with revenues up from $1.25bn to $1.47bn, most of that occurring since 2017, with a 9% gain from 2021 to 2022. This was one factor that made it an appealing target for Viasat, which has proved by far the nimblest and most adept of the fleet operators over the last decade, most active in acquisitions and dispersals. It is partly through acquisition that Viasat has piled on revenue from $1.1bn in 2013, then below all its European rivals, to 2.8bn in 2022, well ahead of them all now. ViaSat has acquired 14 companies in total, including 6 over the last 5 years, while disposing of Tactical Data Link Business to L3 Harris Technologies for $2.0bn.

It now looks like there will be three enlarged fleet operators vying with the new LEO constellations for a market where mobile will loom increasingly large. OneWeb’s executive chair Sunil Bharti Mittal has just identified mobile backhaul as one of the markets where it will be competing with LEO competitor SpaceX in particular.

Mittal noted that operators are already spending substantial sums on mobile backhaul over satellite, with India’s Bharti Airtel for example paying $40m a year just for Africa. Nearly all this backhaul so far has been over GEO which requires more substantial and therefore expensive and energy intensive ground stations. LEO has emerged as a more competitive alternative, with SpaceX Starling emerging as a contender.

The reference to Bharti Airtel here reflects that company helping the UK government to bail out One Web in 2000, followed by a further $500m injection a year later in June 2001 in a deal in which the Indian conglomerate took a 39% stake. Airtel is now well placed to give OneWeb some welcome LEO satellite backhaul business and compete effectively with Starlink on that front. It would still retain a stake in the newly merged company.

The wider point is that LEO broadband is becoming a strategically important sector alongside 5G with a geopolitical dimension, given the potential to reach unserved and undeserved consumers and businesses in more remote areas of developed as well as developing nations. China is already addressing this with state funding as part of its Belt and Road Initiative to extend influence across nonaligned countries, and policy makers in both the EU and the USA are only beginning to give the LEO field the same attention as 5G.

To some extent the UK government recognized the challenge by backing OneWeb, although that partly a response to the country being forced out of the EU Galileo project as a result of Brexit, and partly also to boost the country’s tech sector and shore up the London Stock Exchange by insisting on the company having a listing there.

Competition over LEO broadband will become more intense over the next few years between operators and major countries, with further convergence and effective state subsidy likely to sustain the investment required.