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Thursday, December 2, 2021

Satellite groups face a race to expand or become space junk

Earlier this month, the $7.3 billion offer for British satellite business Inmarsat caused a shock across the industry: after years of discussions about integration, a deal was finally reached, perhaps the first of many.

If completed, the acquisition of the US group Viasat will become the largest acquisition in the global satellite industry and will create its largest participant. It also allows competitors such as SES, Eutelsat, Intelsat and EchoStar to consider how to expand in a fragmented market, otherwise they will face the problem of becoming corporate space junk.

These companies-established companies that operate large, powerful geostationary orbit or GEO satellites 35,000 kilometers above the equator-have dominated the space communications industry for decades.

But in recent years, as sources of cash flow—satellite TV transmissions, expensive satellite phones, and rural Internet connections—have begun to dry up, and the expansion and improvement of terrestrial telecommunications networks, their value has declined.

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This coincides with the rise of low-earth orbit satellites (LEOS), such as Elon Musk’s Starlink, Amazon’s Kuiper Project, and OneWeb supported by the British government.

A new generation of companies has launched thousands of low-cost satellites that can provide broadband, changing the space economy in the process.

Space Capital, which tracks activity growth, reports that it has made $231 billion in equity investments in 1,654 companies in the past decade. The United States and China account for more than two-thirds of expenditures. Just last year, the Chinese government submitted an application for two LEO constellations with nearly 13,000 satellites to the International Telecommunications Union.

None of this helps to improve investors’ confidence in the older generation GEO satellite business.

SES is partly owned by the Luxembourg government, and its transaction price is one-fifth of its market value in 2015, while Eutelsat, which is owned by the French government 20%, lost nearly two-thirds of its value in the same period. The debt-laden US International Telecommunications Satellite Company has not yet withdrawn from the bankruptcy process it entered in May 2020, and billionaire Charlie Ergen’s satellite business EchoStar has lost half its market value since 2017.

The industry has been consolidating for a long time, but it turns out that mergers are difficult to land, usually for political reasons—satellite companies are considered strategic assets—or based on valuation reasons. Due to the cost of launching satellites, the industry is flooded with bankruptcies and debt levels. What industry analyst Chris Quilty calls “small money” hinders integration.

Therefore, about 55 companies are still on the market. This fragmentation and lack of scale are now attracting the attention of outside investors. Inmarsat was privatized last year. Earlier this year, Eutelsat rejected a takeover offer made by billionaire Patrick Drahi.

This helps to focus attention on integration after years of unsuccessful events. The former Nokia CEO Rajeev Suri, who was appointed to run Inmarsat this year, told the Financial Times: “The structure of the industry will change. It should have been long ago. This is a question of when and not if.” He predicted that in the next five years Within seven years, the industry will boil down to a “few” participants. “For the health of the industry, we need to integrate.”

Mark Dankberg, Executive Chairman of Viasat
Mark Dankberg, Executive Chairman of Viasat. Viasat-Inmarsat will have 19 satellites and 20% of industry revenue after the merger © David Paul Morris/Bloomberg

Viasat executive chairman Mark Dankberg believes that outside interest in satellites shows the potential of the industry. “One of the things that Drahy’s proposal does is to highlight the value of satellites. People will see the value coming from the market’s growth,” he said.

Due to the impact of the pandemic on its business that provides communications services for aviation and shipping, the owners of Inmarsat accelerated plans to sell the company. Two people with direct knowledge of the negotiations said that SES also negotiated the Inmarsat deal. SES declined to comment.

Viasat-Inmarsat will have 19 satellites after the merger-10 of which will be launched in the next three years-accounting for 20% of the satellite industry’s revenue. Suri describes it as a “scale and scope” transaction that will strengthen its growth prospects in markets such as maritime, aviation and government.

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The combined company will still be limited to GEO, but the transaction may cause other companies to consider their plans, especially those who want to build a “mega constellation” that will provide services ranging from giant GEO to small LEO.

Others are not convinced that there will be a frantic battle between Viasat’s competitors. Quilty said: “It is not clear whether other satellite operators will choose to follow Viasat’s path, or actively target Viasat’s customers while the company endures a year-long and challenging regulatory approval process.”

Another chief executive of the satellite industry believes that a more fundamental shift is taking place. Billionaires such as Musk, Jeff Bezos, and Richard Branson are “distorting space” through projects that may never be profitable. Real economy”.

“They buy the platform for unsustainable business reasons, but they can use their childhood enthusiasm for participating in space,” the executive said. “There is a lot of value destruction coming, but it may be a few years away, so the party is still going on now.”

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