Eutelsat/Viasat JV raises M&A questions
February 11, 2016
By Chris Forrester
February 9th saw a major announcement from Eutelsat and California-based ViaSat which sees the two satellite operators coming together in a strategic partnership designed to promote and develop satellite-delivered broadband over Europe. One well-placed analyst thinks it could be the harbinger of even greater co-operation between the two, and even mentions the possibility of a merger.
ViaSat is planning a ‘next-generation’ satellite (ViaSat-3) which potentially could deliver more than100 Mb/s, and on a par with the best speeds available from terrestrial cable suppliers. VIaSat says that its new craft will have more capacity than every commercial satellite currently in orbit combined – or 1 Tb/s.
In the immediate short term, the pair will create two new businesses. One will focus on commercial wholesale services while the other looks after retail services. Giles Thorne, an equity analyst at investment bank Jefferies explains.
“The Wholesale entity will see Eutelsat transfer its existing European broadband business into a new vehicle at book cost in exchange for a 51% stake. The assets being transferred include the giant Ka-Sat spacecraft, the ground segment, customers, distribution agreements and orbital / landing rights. WholesaleCo will, for now, provide the wholesale HTS capacity to existing distributors and the new RetailCo. ViaSat will contribute €132.5m of cash in exchange for a 49% stake.”
“RetailCo will build a DTH consumer ISP business in Europe. ViaSat will own 51% of the equity, Eutelsat the remaining 49%. It’s unclear how RetailCo will be capitalised. While much of Eutelsat and ViaSat’s product approach to consumer broadband is similar, ViaSat has executed a full retail model with a brand (Exede), customer service, direct marketing and content partnerships (ViaSat has had a product link-up with DirecTV since 2012). Much of that approach will now be replicated in Europe via RetailCo.”
Thorne says: “It makes sense for Eutelsat to kickstart its flagging retail growth in Ka-Sat (an issue we’ve previously raised) through the leveraging of ViaSat’s successes in the US (where it has 687k subs, compared to Eutelsat’s 190k). The rational for diluting its economics in Ka-Sat and its highly valuable orbital / landing rights however, is not immediately clear – the RetailCo has strong logic but could quite easily have existed under the status quo – we can only assume there is an undisclosed quid pro quo around Eutelsat getting access to ViaSat-3 – our base case would be that Eutelsat participates in the financing of ViaSat-3ii, the ViaSat-3 class satellite due to be launched over MENA in early 2020. It feels almost certain now there won’t be a like-for-like replacement for Ka-Sat.”
Thorne clearly sees considerable advantages for Eutelsat, given that – one way or another – Eutelsat now controls a de facto monopoly for satellite broadband infrastructure over Europe, as well as having a 49 per cent stake in what is likely to be a major new retail player.
There are risks, not least from Europe’s regulators. But the bank concludes: “A deepening relationship in the ‘strategic’ broadband segment will likely raise questions as to M&A, especially should a ViaSat-3 partnership agreement emerge; and [also] how does this agreement create the conditions for protecting Eutelsat’s investments in HTS capacity in Latam and Africa given ViaSat-3’s overlapping footprint and vastly superior economics (adding further weight to an M&A thesis)?
The Eutelsat/ViaSat broadband deal should close this year.
SpaceX loses ViaSat-2 launch
The anxieties over SpaceX launch delays has seemingly forced ViaSat to switch its launch contract for ViaSat-2 – now being built by Boeing – from SpaceX to Arianespace. It will now launch from Kourou in Q1/2017.
Much of the extra detail on the agreement flowed from ViaSat’s CEO Mark Dankberg talking on February 9th following his company’s latest set of results. Dankberg’s plan for ViaSat-3 is truly impressive, and could well be game-changing as far as satellite-delivered broadband is concerned.
Dankberg told analysts that ViaSat would be investing $1.4 billion over the next five years to provide mass-market broadband to consumers (and business and aviation customers) as well as working with Eutelsat to lower the fees paid by off-shore oil and gas platforms who are paying too much for their on-site connectivity.
ViaSat’s COO Richard Baldridge told analysts that its ViaSat-1 craft was now generating really high rates of return and Dankberg amplified this by saying that ViaSat-1 was generating a Return on Invested Capital of between 20 per cent and 40 per cent.