Are Eutelsat’s problems just beginning?
October 18, 2022
Eve Berneke, CEO at Eutelsat, cannot be blamed for attempting to look forward as she seeks to re-establish the satellite operator into a new beast which will offer both geostationary and low Earth orbit connectivity once its merger with OneWeb happens. But the market clearly doesn’t yet totally share her view that ‘jam tomorrow’ is worth the long wait to the restoration of dividends.
For example, since Berneke’s October 12th Capital Market Day marathon presentation in London, Eutelsat’s share price has been highly volatile. A week prior to the event Eutelsat was trading at about €8.43 per share. By October 14th, the price had fallen to €8. This is far from a rout given that on September 29th, the shares had been trading at €7.88. In fact, trading on October 17th saw an impressive uplift of some 4.35 per cent to €8.35 (a rise of 34 cents). But there are few signs of confidence or significant improvement and certainly not to the heady levels of August and early September when shares were trading at more than €9 per share.
Indeed, the market has been anxious about OneWeb ever since the merger announcement in July. Markus Kaussen, an analyst at Swiss asset manager BWM (a top-15 shareholder in Eutelsat), speaking to the FT in July said a deal would “turn the investment case [for Eutelsat] 180 degrees.”
“Right now, it is a boring value stock for income-oriented investors with high free cash flow and high dividends,” he added. “If it were to merge with OneWeb, it would become a growth business hoping that an expensive bet will pay off in the future, rather than an established business with known economics.”
That sentiment has not changed much since July. As Berenberg Bank stated in its Lost in Space note to clients on October 13th, the deal with OneWeb is “transformative” but “completely changes the investment case and risk profile of Eutelsat, from one of a highly cash-generative, dividend-paying value stock to a non-cash-generative, non-dividend-paying growth company. While [October 12th’s] session provided more detail, we believe that the scale of near-term earnings and cash-flow dilution, alongside the increase in the risk profile, will likely put most traditional satellite and telecoms investors off in the near term.”
Moreover, Berenberg echoes the comcerns of many small shareholders who suggest that Eutelsat is not getting its fair slice of the merger cake.
“It is hard to justify a 50/50 merger,” says Berenberg. “Eutelsat is an established and cash-generative business that also already owned 22.9 per cent of OneWeb, while OneWeb is a loss-making start-up, with considerable capex demands to fund a Gen 2 commercial launch by 2028.”
Eutelsat has additional problems: Russia, via the Russian Satellite Communications Company (RSCC) which is the country’s national satellite communications operator, and owns a 3.4 per cent stake in Eutelsat. Some 6.7 per cent of Eutelsat’s revenues come from Russian-based capacity leases (on four satellites owned by RSCC).
As Eutelsat itself admitted back in 2012 when it welcomed RSCC as a shareholder: “RSCC handles important national tasks, supporting mobile presidential and government communications, transmitting federal TV and radio signals throughout Russia and most of the world. The company actively participates in implementing priority national projects. RSCC closely interacts with the Russian state authorities in the development of information and telecommunications systems for communications and broadcasting. RSCC provides a full range of communications and broadcasting services using its own terrestrial equipment and satellite constellations.”
Eutelsat – with OneWeb – is looking to play a significant part the European scheme for an ‘independent’ low Earth orbiting constellation. However, it is also difficult to see how the merged business would continue to tolerate RSCC as a shareholder. It is much the same with China. China Investment Corp currently holds a 5 per cent stake in Eutelsat and the Russian and Chinese investments might make any European participation in a LEO constellation near-impossible to imagine.