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Softbank bails out IntelSat, awaits reaction to OneWeb merger

Softbank has arrived as the unlikely white knight to save Intelsat from running out of cash. It has injected debt funding and proposed a merger through its LEO satellite firm OneWeb. Now bondholders for Intelsat must give the deal the go ahead.

The deal came just as IntelSat announced its Q4 numbers with revenue of $550.7 million and full-year 2016 revenue of $2.2 billion. It said it had EBITDA of $407 million for the quarter and $990 million for the year. When you add the $8.7 billion it has in contracted dealflow, that should mean the company is out of danger, as long as bondholders OK the deal.

OneWeb’s mission it to target the last few million potential broadband subscribers on the planet and plans to build a constellation of Low Earth Orbit satellites, to provide connectivity, rather like Iridium. The deal is a simple share for share merger while parent Softbank puts $1.7 billion of cash into the company as it combines. To us this looks like an opportunist deal which may fall foul of debt-holders, who may feel there are other potential choices and who may invite counter-offers from other satellite or private equity groupings.

The deal comes with debt exchange offers which when combined with the $1.7 billion should reduce Intelsat’s debt by $3.6 billion. Currently it has $14.5 billion in debt, yielding varying interest rates between 5.5% and 12.5%. It has 90 days to push the deal through the debt-holders. If the deal goes through the stock will be held through Softbank’s Vision Fund.

OneWeb is after Intelsat’s EpicNG fleet so it can merge its own LEO satellite constellation with Intelsat’s infrastructure on the ground and its GEO satellite network. If the transaction goes through the ratio of debt to EBITDA will fall from 8.8x today to 6.6x, Softbank said. IntelSat’s value on the stock market has been around $500 million for the past 18 months, as investors realized the level of debt it held. Intelsat was a founding investor in OneWeb, making a minority equity investment in 2015.

Intelsat’s Ku-band infrastructure is said to be suitable for consumer broadband, connected cars, cellular backhaul, the Internet of Things, and machine-to-machine communications. Although both connected cars and cellular backhaul have some latency requirements that are beyond satellite.

The press release talks about delivering video using satellite for its media customers to support OTT networks. However, the truth is that OTT video services are sabotaging video pricing in satellite channel delivery, and debt holders should beware of any strategy which holds up OTT as an opportunity, rather than a threat.

Under the terms of the transactions, SoftBank will acquire common shares in the combined company, of around 39.9% voting stake. Additional non-voting shares will be bought with the $1.7 billion. Any common shares purchased by SoftBank will be for $5.00 per share in cash. In the business combination, OneWeb shareholders will receive Intelsat common shares in exchange for their OneWeb shares. Intelsat will issue about 800 million shares to make the deal happen diluting existing shareholders. The combined company will remain domiciled in Luxembourg, and continue to be listed on the New York Stock Exchange. The deal has been approved by both companies’ boards.

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