CBA a mess, but good news in sight?

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It is unlikely that the world’s two major satellite operators, Intelsat and SES, have ever experienced such dramatic collective meltdowns in their share prices. Of course, there have been profit warnings from time to time, but nothing to compare with this week’s catastrophic collapse in their company theoretical values.

As this is written, SES has suffered another battering, with an 8 per cent fall (€1.22) which when added to the after-hours crash on November 12th means that SES stock has evaporated in price down from €17 to €13.80 on the back of negative speculation over the impending C-band decision by the FCC.

Intelsat’s crash has been every bit as dramatic, from $24 a share to as low as $13.54 at one point on Wednesday, and a thumping 30 per cent in one day. Intelsat tumbled another 16 percent on November 14th to close at just $12.13 and at $11.46 at one point during the day). A year ago the shares were trading at almost $30.

But there are signs that the current nightmare might be speedily reversed…

Investment bank reports have flowed thick and fast. The note from Jefferies is typical and has analyst Giles Thorne trying to put this negative genie back into its bottle, and urging investors to be ultra-cautious over the two earlier catalyst reports (from Capital Forum and JPMorgan) which dwelt heavily on comments made by FCC Chairman Ajit Pai almost a month ago.

Thorne says: “If we’re right, then nothing has changed, other than two parties’ views: Namely, JPM and Capital Forum – and the last time we checked, neither will be directly contributing to the drafting and content of the FCC Order. The matter of spectrum for 5G was always going to be an emotive subject given the intensive current use of the band by operators foreign to US soil but if we go to the heart of what the FCC’s 5G Fast Plan wants to achieve and how it will achieve it, no amount of showmanship during a subcommittee oversight hearing is going to change the FCC from its stated aim of bringing forward an Order that: releases as much C-band spectrum as possible; as quickly as possible; while protecting the incumbent use case; and raising proceeds for the US Treasury. The CBA proposal remains the most aligned to the FCC. All else being equal, we remain confident of a favourable Order in the near term.”

Thorne argues that the two negative reports are “the tail wagging the dog”. The industry can only hope the bank is right.

Another follow-up bank comment came from Sami Kassab at Exane/BNPP, saying that the price reactions were wholly overdone. “We believe the market may have misinterpreted two important elements. First, as we have continuously argued, the FCC is not going to accept the CBA proposal. We continue to argue it is to adopt a hybrid approach. But this approach will enable Satellites operators to monetise C-band. Shares unduly fell as the market focussed on the idea that the FCC is not to adopt the CBA proposal.”

“Secondly, shares fell on the public vs private auction debate. We continue to argue that this is a minor element in the story. Two weeks ago, the CBA together with ATT and Verizon published the set of auction principles they would like to use for the auction. These principles are the standards principles used by the FCC in previous auctions. We don’t believe the pricing outcome is going to be any different if the FCC runs the auction and applies the set of auction principles proposed by the CBA (with ATT and Verizon backing). Remember the FCC is required by law to organise competitive auctions. We accept that timing could be pushed back by a few months but that does not justify the price movement,” he added.

Kassab reminds clients that there’s a planned C-band hearing on Nov 20th and this might not be to the CBA’s liking. The following day the FCC will publish its agenda for a meeting it is holding on Dec 12th when most expect a more positive newsflow.

Indeed, that positive sentiment might now be happening. Comments – from Kassab – late Thursday afternoon, suggests that a leading Senate lawmaker, in an interview on Bloomberg, said that he will “pursue [the FCC] decision like a hound from Hell. And if the FCC wants to go forward and screw the American taxpayer, I will remind them of the mistake they made every day for the rest of their natural lives”:

Kassab adds: “In our view, his comments suggest that the FCC is well-advanced down the road of backing the satellite operators and of enabling them to monetise (hence his language and comments). We take this as supportive for our positive stance on SES [and by implication Intelsat].”

“The question is whether Senator John Kennedy (Rep, Louisiana, and Chair of the Senate’s Financial Services Sub-Committee) has enough power to change the FCC’s course of action […] We believe this probably depends on the position of the White House and President Trump on the topic. Is Trump going to let the Chinese beat the US on the race to 5G or is he going to cut a deal with the satellite operators to make sure $7-10 billion of C-band proceeds flow into the coffers of the US Treasury? Our guess remains that a 25 percent contribution to the Treasury (and perhaps more above a certain level of gross proceeds) is a good way to split the baby and get the deal done,” Kassab concluded.

However, powerful figures such as Senator Kennedy might simply ensure that the CBA’s plans, if endorsed in some form by the FCC, might simply be bogged down in legal challenges for some time to come.


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