Advanced Television

Fitch: GES acquisition Neutral for SES rating

March 24, 2022

SES’s (BBB/Stable) planned acquisition of DRS Global Enterprise Solutions (GES), provider of commercial satellite communications to the US government, will have no impact on SES’s ratings, Fitch Ratings says.

SES announced March 21st that it had entered into an agreement with Leonardo DRS, a US subsidiary of Leonardo S.p.A. (BBB-/Stable), to acquire GES for $450 million (€408.8m). The transaction is expected to be completed in H2 2022, subject to regulatory approvals. By SES’s estimates, the business will add annually $250 million to its revenue and $40 million to its EBITDA (company-defined).

According to Fitch, the transaction has a strong industrial rationale. The acquisition of GES will expand SES’s vertical integration, allow SES to have better access to the market participants and to almost double the size of its government segment to €500 million from €300 million. It will also bring expertise in cyber security and integrated satellite-terrestrial solutions.

SES expects $25 million annualised EBITDA (company-defined) synergies to be realised in three years’ time following completion of the transaction. The synergies will arise from savings related to the usage of satellite capacity (about 60 per cent of total savings) and operating expenses due to elimination of duplicated functions (about 40 per cent of total savings).

Fitch expects that the transaction will result in 2022 pro-forma funds from operations net leverage increase by 0.2x. This will be partly counterbalanced by a leverage decline of 0.1x, positively affected by the additional $170 million gross proceeds in 2022 from Verizon Communications through accelerated C-Band spectrum clearing. As a result, Fitch expects the leverage will peak to 3.6x in 2022 on a pro-forma basis compared with its previous expectation of 3.5x for 2022.

The leverage spike in 2022 will be primarily driven by €950 million of capex. Fitch envisages the leverage to decline below the company’s downgrade threshold of 3.3x after 2023, supported by improving EBITDA and lower capex. The sale of C-band spectrum in the US has already delivered $1 billion of gross proceeds over 2021-2022 (in addition to the abovementioned $170 million) and should deliver a further $3 billion in 2024. This will give SES significant discretionary capacity to manage its financial profile.

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