Bank modifies Eutelsat outlook

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This week Eutelsat confirmed it would invest $550 million in broadband constellation OneWeb in return for a 24 percent stake in OneWeb. Ratings agency Fitch has given a “BBB” rating for Eutelsat with a “Stable Outlook”.

The ratings report comes as investment bank Exane/BNPP also slightly modified its view of the deal, saying: “This initial stake of 24 per cent is likely to be diluted down to c20 per cent once OneWeb completes the full funding of its mega constellation. Eutelsat will have the same governance rights than the two other largest shareholders (the UK Government and Bharti Airtel). Eutelsat expects OneWeb to enter into partial commercial service by year end and to be in full commercial service by December 2022. It is targeting cUSD1bn of revenues within 3 to 5 years of commercial start on high levels of EBITDA margins (B2B wholesale model not retail B2C). Eutelsat sees a strong strategic rationale in combining high density, low cost GEO satellites with the low latency, global coverage of LEO constellations. It also argues that this investment will generate an IRR exceeding their hurdle rate (we estimate at 10 per cent post tax). The OneWeb investment will be largely funded by the early receipt of the US$507 million C-band payment. All financial targets of Eutelsat have been reiterated.”

The bank’s report adds: “We also believe that OneWeb currently looks as the least attractive mega-constellation from a technological and economic point of view. OneWeb was created in 2012. It has been late to deploy its first-generation technology. It took 10 years for the project to enter into service. It took only 5 years for Space X Starlink. Its satellites have no inter-satellite links and have no steerable beams (unlike other LEOs). According to Eutelsat total sellable capacity is 1.1Tbps (we had estimated 0.9Tbps as we exclude China and Russia) while we estimate competitors will bring 5 to 10x more. Generation 1 has not even been deployed and talks are already focussed on how the next generation of satellites will improve the current one. As per our recent report on Satellites, we also estimate that OneWeb has the highest capex per Gb/s per year and hence less attractive bandwidth economics than competitors.”

Exane/BNPP continues: “We are also pointing to the price paid by Eutelsat to acquire its stake. The UK Government and Bharti reportedly paid US$500 million for a 24 percent equity stake (after the ETL dilution of their initial 45 percent equity stake) at the end of last year. Eutelsat is paying a c10% premium. Eutelsat is paying US$550m for an economic interest in around 250Gb/s of low latency capacity. It paid the same amount for 500Gb/s of capacity on its high latency Konnect VHTS. Management argues that the timing is right because Chapter 11 has erased US$3.5 billion of OneWeb’s debt and hence enables entry into an attractive point generating a double digit IRR. But we believe Eutelsat is paying a high price for a seat at the table of a low latency mega-constellation.

The bank concludes by saying: “We also argue that the price Eutelsat paid offers a positive read across to SES. We estimate SES will have invested 3 to 4x more than Eutelsat for full ownership of a mega-constellation [O3b/mPower] delivering 50x more capacity.”


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