The bid for Eutelsat by businessman Patrick Drahi, rejected by the satellite company, might well trigger other bidders to enter the picture.
Sami Kassab, equity analyst at investment bank Exane/BNPP, poses some interesting suggestions as to potential rival bidders to Drahi.
Kassab argues that the key to anyone’s success in the validation of the bid by the French Government which holds almost 20 per cent in Eutelsat through its BPI France stake. He says that the French state considers Eutelsat an asset of sovereign relevance. “[France] will have to give its blessing to such a transaction. In our view, one key question is whether the French Government will consider Patrick Drahi as a good steward of a sovereign asset or whether it would prefer Eutelsat to be acquired by another player, if at all.”
“On the one hand side, Patrick Drahi owns SFR and other French media assets, he is a well-established French businessman. In 2016, the deputy CEO of SFR, Bernard Mourad, resigned from his position to help Emmanuel Macron’s presidential campaign,” says Kassab. “On the other hand, some have argued that SFR has run into operating underperformance since being acquired by Altice and that Altice USA is also having operating difficulties. Patrick Drahi’s debt-funded, cost-cutting, M&A led approach to building a telecommunications group may be considered as a somewhat risky management style to operate Eutelsat.”
Kassab lists Orange as a potential bidder: “In our view, a counter bid from Orange looks credible. First, the convergence theme applies to this group as well. Secondly, we note that at the Satellite 2019 conference in Washington, Jean Luc Vuillemin (Executive Vice President International Networks at Orange) talked about the technical progress the satellite industry had made in recent years and suggested that operators would become more credible partners in terms of network connectivity. Third, Orange is a major customer of Eutelsat (on VHTS as well as through GlobeCast) and SES O3b. Lastly, the French government directly owns 23 per cent of the group. Orange might be a more appropriate shareholder for a company of sovereign relevance.”
Kassab adds Airbus to the portfolio of potential bidders, saying: “Today, Airbus already owns 50 per cent of OneWeb Satellites, the manufacturing entity of the OneWeb constellation. In our view, this mollifies the main counter argument to vertical integration (e.g why would SES buy our spacecraft if we own their main competitor). Airbus owns the JV that manufactures OneWeb and yet continues to sell satellites to competitors such as Inmarsat.”
Then there’s SES. The industry has talked about a merger between Europe’s two giant satellite operators Eutelsat and SES for years.
“We estimate annual opex synergies at c€200 million and annual capex savings at around c€200 million. We believe this approach to Eutelsat could lead SES (and the government of Luxembourg) to reconsider their position. We also believe that such a merger would create a European space champion better positioned and with more resources to compete against American and Asean competitors. A merged entity would be the only player in the world with LEO, MEO and GEO assets able to focus on the appeal of GEO bandwidth economics or the low latency characteristics of LEO/MEO as needed. From a political point of view, we believe a European satellite champion would be well positioned to operate the EU LEO platform (rather than having to favour one player over the other). A SES/Eutelsat merger remains first and foremost a political decision to be taken by the French and Luxemburgish governments in the context of the European space policy,” says the bank’s report.
Kassab includes one left field proposal as a potential bidder in the shape of Amazon: “We believe Amazon is on the clock to deploy its Project Kuiper constellation. We understand its regulatory requirements imply that around 320 satellites be deployed before July 2023 with half of the constellation deployed by July 2026. Amazon has not launched a single satellite yet. Buying Eutelsat would catapult Amazon as one of a handful of multi-orbit systems and the only dual band LEO constellation. OneWeb operates in Ku, Kuiper in Ka, Starlink user feeds are also in Ku. We believe that such a multi-orbit, multi-band acquisition could give Amazon a competitive edge over its closest rival, SpaceX. However, we doubt that the French government would approve such a transaction as it would weaken the European position in the space economy.”
In a separate report from Kassab, he suggests that investors should expect Drahi to make a revised bid to acquire Eutelsat. He adds that “counter bids are possible” and the bank raises its advice to clients from “Underperform” to “Neutral”.
Kassab says that a merger between Drahi’s main asset vehicle, Altice, makes both strategic and financial sense.
“In the age of high-throughput mega-constellations, we see the terrestrial telecommunication and satellite industries converging. Governments have taken notice and are willing to fund space connectivity projects. Like Musk and Bezos, Drahi might be attracted by the global opportunity to bridge the digital divide with space assets or may want to reproduce his successful roll-up strategy of cable operators in the upcoming consolidation of the satellite industry. In addition, Eutelsat’s c€400 million of annual Free Cashflow would materially improve Altice’s cash generation profile in the case of a merger,” states Kassab.
“We believe that the French government is likely to play a pivotal role in any transaction involving an asset of sovereign relevance such as Eutelsat. We also believe that counter bidders could emerge, encouraged by strategic, financial or political considerations. We see Orange, Airbus, SES and Amazon as potential bidders,” adds the bank’s report.
The bank says it believes a revised offer from Drahi or alternative bidders is a likely scenario. “We set our Target price at €13 reflecting a 60 per cent probability of a bid at €15 and a 40 per cent likelihood that Drahi’s bid falls through for political or financial reasons with shares reverting to their pre-offer levels of €10.30. We have cut our 2021 Earnings Per Share by 2 per cent on lower Government revenues following the US troop withdrawal from Afghanistan.”
The report reminds clients that Drahi has built his telecommunications group in a succession of debt-funded M&A deals. “His European assets now have over €30 billion of debt. However, we doubt that he will be able to increase the debt leverage on Eutelsat significantly. With Satellite video revenues (an est. two thirds of group EBITDA) seen in structural decline and given the recent history of bankruptcies in this industry (Intelsat, OneWeb, Avanti), we doubt that lenders would increase leverage significantly. We note however that Intelsat is likely to exit Chapter 11 with around 5x EBITDA in debt (less than half the ratio it had going into bankruptcy). We believe that Eutelsat’s main appeal lies in the cash generation of the business.”
“We see a scenario whereby Patrick Drahi pursues an industry consolidation strategy as he has carried out in the US and European cable industry. Eutelsat would be a first step on that project,” states Kassab.