Further bad news for Eutelsat/OneWeb
August 1, 2022
The EU has firmly ruled out the proposed Eutelsat/OneWeb merger as qualifying as the likely candidate for the EU’s own planned Low Earth Orbiting (LEO) broadband constellation.
As reported by Sami Kassab, satellite analyst at investment bank Exane/BNPP, Christophe Grudler, the member of the European Parliament in charge of the EU’s LEO satellite project announced that “a rapprochement of OneWeb with the European constellation seems impossible”. He claimed that “the EU cannot accept a UK veto on a secure connectivity infrastructure”. He argued that “the European Union needs to have full control over its satellites without a risk of hindrance by an outside actor.” Adding “Europe will not compromise on this point”.
Grudler is referring to the golden share the UK Government has in OneWeb, and which Eutelsat says would remain in place once the ‘merger’ with OneWeb goes ahead. The ‘golden share’ has the ability to block the sale of OneWeb capacity to undesired countries.
Kassab adds: “The EU LEO constellation project is first and foremost a political project and much can still happen. However, such statements from the EU’s MP in charge of the project at the EU Parliament does not look supportive for Eutelsat.”
This is but one of the problems that has emerged over the past few days.
Problem Number two concerns China’s involvement in Eutelsat. China Investment Corp (CIC) has a near-6 per cent stake in Eutelsat, and this is worrying British parliamentarians. Darren Jones, chair of UK’s cross-party influential Business Committee has written to Business Secretary Kwasi Kwarteng to raise concerns about China’s stake, according to reports. Jones has evidently demanded that the link is closely scrutinised alongside Eutelsat’s broadcasts of Russian TV channels during the war in Ukraine.
Even more heavyweight is the opinion of Iain Duncan Smith, a former Leader of the Opposition, and still a highly vocal member of parliament. He believes the Government will have to stop OneWeb’s sale for national security reasons. He is quoted as saying: ‘”China is a direct threat now to the UK and its interests. We simply cannot allow it to have access either to our technology or to gain financial advantage as a result of a British technology company. I am sure now, armed with this information, the Government will block this sale”.
Problem three is ratings agency Fitch which on July 29th placed Eutelsat on “Rating Watch negative”, saying that it recognises the “strategic nature of OneWeb’s spectrum holding, the scope for synergies and the potential for strong longer-term growth for the combined businesses. However, the pace and extent of this growth over the next three to five years is highly uncertain while the cash burn for OneWeb’s upfront investments remains high”.
Fitch says the planned merger by Eutelsat with OneWeb is seen as “credit negative” for Eutelsat’s operating profile at least in the short-to-medium term. On the upside, Fitch says that its Rating Watch is likely to be resolved once the deal is closed in early 2023.
Problem Number four concerns Eutelsat’s dividend policy. CEO Eva Berneke said on July 26th that the company, subject to Board approval, would pay its shareholders their promised dividend this coming November. Thereafter, she said for at least two trading years (2022-2023 and 2023-2024) there would be no dividend. However, she declined to commit specifically to the trading year when a dividend would be reinstated, saying only that a return to paying dividends is expected during the “medium term”.
These statements are wholly contrary to comments made during Eutelsat’s Q3/2022 trading update on May 12th, when she stated that Eutelsat would continue its policy of a “stable to progressive” dividend pay-out.
This statement was made while Eutelsat was well aware that it had been in discussions for some 18 months (as confirmed by OneWeb CEO Neil Masterson) about developing its relationship with OneWeb. Stage 1 of these talks led to Eutelsat in March confirming it had signed a “global, multi-year distribution agreement” with OneWeb which would mean it was the only satellite operator to offer a GEO/LEO service across the Maritime, Aviation, Enterprise, Telcos and Government business segments. Stage 2 was the formal merger announcement made last week, and which certainly could not have happened overnight.
Problem Number five comes from Kassab in his July 28t report on Eutelsat, which gave investors “Neutral” advice and a target share price of just €7.50, which is a significant reduction from his advice prior to the announcement of Eutelsat’s planned merger with OneWeb. Back in May 2022, his target price for Eutelsat was €12 per share.
A number of other analysts have also looked at Eutelsat, although not all of them have updated their advice subsequent to the merger announcement.
Deutsche Bank downgraded its advice from “Buy” to “Hold” in its note on July 27th.
Cheuvreux also downgraded Eutelsat from a “Buy” to “Hold” on July 26th.
Since the beginning of 2022, Eutelsat’s share price has crashed from €10.88 per share to €7.43 on July 29th and at one point last week hit €7.01, thelowest value for the past five years.
This sell-off by smaller investors has to be a worry for Eutelsat. The prospects of a two year (or longer) wait for dividends to be reinstated more of less matches the period when OneWeb is expected to come into its own and start banking real cash. But it might not! That’s what shareholding is all about, and share values can fall as well as rise. Eutelsat’s dividend has always been good, and with yields of around 9 per cent, it represented a dependable investment. That could now be under threat.