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Eutelsat move for Inmarsat “just tyre kicking”

June 27, 2018

One equity analyst thinks Eutelsat’s potential bid for London-based Inmarsat is “questionable” and “offers no strategic benefits to Eutelsat’s core Video and Consumer Broadband” services which represent 80 per cent of Eutelsat’s revenue streams.

Eutelsat itself stressed June 26th (and just 24 hours after saying that it was interested) that it does not intend to make an offer, but also stated that it still reserves the right to make a move on Inmarsat.

Sami Kassab, an equity analyst at investment bank Exane/BNPP, went further June 26th, with his analysis and saying: “[the bid] would not efficiently reduce market overcapacity. Eutelsat does not appear to have a need for L-band GEO spectrum rights neither. In our view, acquiring Inmarsat would raise question marks on Eutelsat’s ability to deliver on its return to growth strategy through Video and Consumer Broadband.”

The bank’s note admits that the two main arms of the satellite industry (Fixed Satellite Services and Mobile Satellite Services) have been converging in recent years. The bank reminds clients: “Two months ago, Thuraya (the third largest MSS provider) was acquired by Yahsat, a leading FSS operator in the Middle East. Mobility is the fastest growing segment for any player in the satellite industry.”

Kassab says that Eutelsat management has often argued that it would not be against an opportunistic acquisition if it were to provide for Opex or Capex synergies. With Inmarsat competing head-on against Eutelsat in the Enterprise and Government markets in particular, some opex synergies are likely. We believe opex synergies in Maritime and Aviation are likely to be much smaller. Maritime is small for Eutelsat and the vertical and geographic focus of both companies in Aviation differ. We have assumed USD70m or c10 per cent of Inmarsat’s opex, including a reduction in Central Services costs (20 per cent of Inmarsat’s group revenues).”

But he states that Capex synergies would have to be very substantial to provide a solid strategic rationale. “While harder to quantify, this is not unlikely. We estimate that over 90% of Inmarsat’s revenues are generated from a fleet of older satellites (Inmarsat 3s and Inmarsat 4s) launched between 1995 and 2008. The unit cost of these satellites is likely to be much lower than when first launched 20 years ago. Lowering the capex associated to L-band revenues would probably increase the ROCE and value of these orbital positions. Something Inmarsat’s management will have in mind when discussing bids.”

“The satellite industry is indeed exposed to overcapacity in several segments, most notably the Data and Mobility segments,” says the bank. “However, we doubt that such a consolidation would do much to remove the excess capacity. For one, Eutelsat would struggle to retire assets recently acquired. Secondly, with 5 to 8 players per market, being the first company to acquire a competitor would still leave 4-7 players and hence do little to remove excess capacity in our view.”

Kassab summarises his thoughts by saying the deal’s valuation does not look compelling, although Eutelsat could benefit from some tax optimisation and if successful in a bid would immediately become the largest satellite operator in the world. “We think management is just tyre-kicking and unlikely to move. But we expect short term pressure on Eutelsat’s shares.”

Tyre-kicking or not, a Eutelsat bid from Paris might not go down so well with British politicians especially in the current Galileo/Brexit climate…

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