Eutelsat hamstrung by French tax rates

Investment bank Berenberg, in a 10-page report on satellite operator Eutelsat, says it is increasingly difficult to accurately compare and contrast Eutelsat with its Luxembourg rival SES. The bank’s headline advice is for investors to “HOLD” their positions in Eutelsat despite the operator paying “well over two-times the tax rate of SES” and also having an above sector average exposure to doing business with Russia.

Eutelsat’s Russian exposure is a double threat, first from the prospects of increased competition in Russia but also the “negative economic pressures that could limit the pace of new channel launches and upgrades to HD and UHD. This is reflected in a slower fill rate that we now assume on the recent AT2 satellite,” suggests the bank.

There’s another major difference between SES and Eutelsat, says the bank. “SES pays for its satellites upfront, whereas Eutelsat has now made a number of procurements via the lease method, which defers payment.”

Both of Eutelsat’s main satellite rivals, Intelsat and SES, are formally domiciled in Luxembourg.

In the past, Eutelsat has paid for its new satellites over the three year ‘design, build and launch’ period, which is perfectly normal for the industry. But, as with Eutelsat 36C, the operator is leasing the craft and only recognises a lease liability once the satellite enters commercial service in late 2016.

Eutelsat 36C is a heavyweight craft with 70 transponders, and a lease cost of about €400 million.

This shift in the way it does business allows Eutelsat to defer the Capital Expenditure costs needed for a new satellite, and also to keep Eutelsat under its self-imposed debt levels and thus its investment grade (net debt/EBITDA of about 3.3x).

Cleverly – although some might argue craftily – Eutelsat is offering investors who would normally be getting a dividend payment about now that it could accept in place of a €1.03/share dividend new shares in the company (“Scrip”) and at a discount. In other words Eutelsat is absolved from paying out cash to investors, with most likely to accept the Scrip shares on offer. Berenberg reckons that around 50 per cent of the dividend will be in the form of new shares, or a €100 million cash saving.

“This being said, it is clear that should Eutelsat wish to engage in M&A of any meaningful size, it would likely require equity funding. New satellites, meanwhile, should Eutelsat make further procurements in the next couple of years, would likely need to be bought using the same lease accounting,” says Berenberg.

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