By Prerak Goel (LSE)
Photo: NASA (Unsplash)
Overview of the deal
Total Transaction Size: $3.4bn
Closed date: H1 2023
Target advisors: Barclays (financial), Herbert Smith Freehills LLP (legal)
Acquirer advisors: d’Angelin & Co., Perella Weinberg Partners and Rothschild & Co (financial), Weil Gotshal & Manges (legal)
Eutelsat, a long-established provider of satellite services for myriad industries, and UK-based OneWeb, the second largest Low Earth Orbit (LEO) satellite operator in the world, have signed a Memorandum of Understanding with a view to combining the two businesses in an all-share transaction. The deal is structured as an exchange of OneWeb shares by its shareholders with new shares issued by Eutelsat, such that, at closing, Eutelast would own 100% of OneWeb. OneWeb shareholders will receive a sizable opportunity to share in the merged company’s upside, receiving 230 million newly issued Eutelsat shares representing 50% of the enlarged share capital.
The UK Government will maintain a ‘special share’ in OneWeb, as a concession for the taxpayers’ $500mn bailout package for the firm, after the company filed for bankruptcy in 2020, having burned through $3bn raised from notable investors including SoftBank, Qualcomm and Virgin.
The deal builds upon the already-deep collaboration between the businesses, begun with the 24% stake Eutelsat acquired in OneWeb in April 2021 (to bolster connectivity services amid a gradual decline in its legacy satellite TV business), the global distribution agreement announced in March 2022, and the new exclusive commercial partnership signed with this deal.
Eutelsat will add its 36-strong fleet of Geostationary Orbit (GEO) satellites to OneWeb’s LEO constellation, with 428 satellites already in orbit, to generate combined revenues of €1.2 billion and create a global leader uniquely positioned for capturing the fast-growing connectivity markets with complementary GEO/LEO offering. The compelling financial profile of the deal highlights the deal's merits, with potential for double-digit revenue and EBITDA CAGR over the medium to long-term, and more than €1.5bn potential incremental value-creation after tax (net of implementation cost) stemming from revenue, capex and cost synergies.
Trading under its existing name, OneWeb will continue to operate the LEO business of the combined group and OneWeb’s headquarters will remain in the UK. Eutelsat will continue to be listed on Euronext Paris and will apply for admission to listing on the London Stock Exchange.
The deal will be subject to UK and international regulatory approvals – including through the National Security and Investments Act - and the approval of Eutelsat’s shareholders. The merger is expected to complete in the first half of 2023.
Company Details (Acquirer - Eutelsat)
Eutelsat is a French-based world leading satellite operator with a 36-strong fleet of GEO satellites, serving users across the world in broadcast television and aviation, to IoT (internet of things) and telecom. The company is the world’s third-largest satellite operator in terms of revenue, and counts the French state-owned investment bank, Bpifrance as its biggest shareholder.
Founded in 1997, headquartered in Paris, France
CEO: Eva Berneke
Number of employees: 1,200
Market Cap: €1.8bn (as of 06/12/2022)
FY22 Revenue: €1.15bn
FY22 EBITDA: €863mn
FY22 EV/Revenue: 4.0x
FY22 EV/EBITDA: 5.4x
Company Details (Target - OneWeb)
OneWeb is a London-headquartered global communications network powered by a constellation of 648 LEO satellites, enabling high-speed, low latency internet connectivity for governments, businesses and communities worldwide. The company has a satellite manufacturing facility in Florida - OneWeb Satellites - that is a joint venture (JV) with Airbus Defence and Space. OneWeb also boasts a strategic alliance with US telecoms company, AT&T.
Founded in 2012, headquartered in London, UK
CEO: Neil Masterson
Number of employees: ~600
EV: $3.4bn (valuation implied by acquisition)
FY25E Revenue: $300mn - $500mn
LTM EBITDA: ($198mn)
FY25E EV/Revenue: 6.8x - 11.3x
Projections and Assumptions
The operations of Eutelsat and OneWeb are highly complementary. Combining GEO + LEO capabilities will enhance network resilience and improve quality of service from day 1, with bundled GEO/LEO packages to be sold to customers by the end of 2022.
Eutelsat’s GEO satellites, which are higher altitude and thus higher latency, are better suited for things like weather forecasts and TV broadcasts. And OneWeb’s constellation of lower-altitude satellites are better for critical communications that require low-latency data transfers. Combined, the companies argue that they will be better positioned to target a broader array of use cases across the B2B and B2C spheres. According to the companies’ joint press release, a clear roadmap has been drawn up to develop a complementary GEO/LEO service including a common platform, hybrid terminals and fully mutualised network creating a one-stop shop solution for customers, providing them with a unique offering and a seamless user experience.
Burdened by a declining satellite video business, Eutelsat aims to tap into the growth of real-time video gaming and rising demand for fast internet connections from companies, which increasingly rely on cloud computing services for their daily operations, with B2B connectivity expected to contribute 50% of revenue over the medium-term (FY24-25), addressed by the combined capabilities of GEO/LEO.
However, investors appeared unconvinced by the takeover, with shares of Eutelsat trading at their lowest level since late 2020, dropping 17% at announcement as investors balked at the prospect of a deal. Eutelsat said it would temporarily suspend its dividend for three fiscal years to funnel cash flow to deploying OneWeb’s satellite constellation. Eutelsat’s strong cash flow generation will provide visibility and funding to support the continued expansion into the LEO market through OneWeb’s next generation of satellites (Gen-2 constellation), while maintaining a strong balance sheet.
With demand for satellite launches expected to accelerate after recent sanctions sidelined the Russian space launch industry, this deal is opportune as Eutelsat’s institutional relationships, and regulatory know-how will help accelerate OneWeb’s commercial launch and the ramp-up of its services globally. OneWeb is set to deploy its remaining 220 satellites in 6 months, with global services slated to start commercially in 15 months.
Under the proposals, current Eutelsat CEO Eva Berneke would stay as CEO of the new combined company, while chairman Dominique D’Hinnin will also continue as head of the board. It’s not clear what role — if any — OneWeb CEO Neil Masterson would have at the new company.
OneWeb’s non-geostationary (NGSO) network is key to competing in a satellite connectivity market that is projected to more than triple to $16bn by 2030. Eutelsat’s CEO, Eva Berneke, said ~50% of this future market will be captured by the NGSO sector, where she believes OneWeb’s low-latency services will have an edge by tapping into Eutelsat’s higher-bandwidth satellites in geostationary orbit (GEO).
A number of notable players are battling it out in the burgeoning satellite space race, including Amazon via its Kuiper project that is expected to begin launching satellites later this year; and more notably Elon Musk-led SpaceX, which has more than 2,500 satellites in orbit. While a pioneer with its LEO constellation, OneWeb looks to capitalise on this huge investment from Eutelsat to keep up with SpaceX’s newer technology.
Moreover, SpaceX is already selling its Starlink-branded broadband service directly to consumers in several markets around the world. OneWeb has been ramping up its commercial agreements, including a deal with AT&T to deliver high-speed broadband to remote locations in the U.S. This highlights one of the key differences between SpaceX’s Starlink and OneWeb — the former seems to be targeting consumers directly, whereas OneWeb is pursuing a B2B approach.
The combination of Eutelsat and OneWeb is forecast to generate substantial value. Average annual revenue synergies are estimated at c. €150m after four years, with integrated and hybridised GEO/LEO offerings providing a premium service to customers as well as improving the fill rate. Capex optimisation (a significant expenditure within the satellite internet industry, representing 25% of Eutalsat’s FY22 revenue) is expected to generate average savings estimated at c. €80m per annum, from year one. This would be achieved by leveraging the hybrid GEO/LEO satellite infrastructure (with an optimised constellation requiring fewer total satellites in combined fleet with higher fill rates, and GEO satellites complementing LEO with targeted capacity over high demand areas) and through the improved purchasing power of the combined entity. These sources of incremental value creation, taken together, equate to an NPV of over €1.5bn after tax (net of implementation costs).
Revenues are forecast to grow at low double-digit CAGR over the next decade, while EBITDA is expected to grow at a mid-teen CAGR over the medium to long term, outpacing sales growth, with EBITDA margin levels moving gradually back in line with best-in-class GEO standards. With a $1.9bn “risk-weighted pipeline” of potential deals across enterprise, government, aviation, and maritime markets and nearly $700mn worth of customer contracts signed, Eutelsat aims to nearly double annual sales in five years to around $2 billion if the deal gets approved.
ESG is also top of mind. GEO/LEO capabilities in combination open up new means to address the world’s digital white zones, allowing the merged entity to bridge the digital divide. Moreover, space launches can have a hefty carbon footprint due to the burning of solid rocket fuels. Fleet optimisation by both entities, however, will lead to efficiency in the number of satellites and launches, mitigating impact to the environment, although the extent of such efficiency gains in terms of reduced carbon emissions is questionable.
Risks and Uncertainties
With the sharp fall in Eutelsat’s share price upon announcement of the deal, shareholders aren’t hiding their disappointment that the group, known for its high cash flow and dividends, would be devoting cash to the deal and less to shareholder returns. Therefore, given the deal is subject to a shareholder vote at Eutelsat, there is a chance shareholders and management do not meet eye-to-eye on the company’s riskier bet on future growth. However, having suffered from years of underperformance, with revenue declining 17% between June 2018 and June 2022, management hopes to woo shareholders into believing the expensive bet represents a massive growth opportunity and will pay off in the future.
The deal will also be subject to UK and international regulatory approvals – including through the National Security and Investments Act. With the UK government retaining a special share and its exclusive rights over OneWeb - securing the company’s future at the centre of the combined group’s global LEO business and national security controls over the network, it is likely the deal will pass muster with UK authorities, although the Tory faithful are likely to defend the UK’s treasured assets from foreign takeover - especially one originating from the EU - in the wake of Brexit. The deal will also see the government join a peculiar roster of shareholders in Eutelsat, including the Chinese state, which could raise eyebrows among the UK’s closest allies, not least the U.S.
There are thus looming balancing acts between the different shareholders in the combined entity, with the UK government retaining a veto power on some decisions. With the French and UK governments formally coming together as joint shareholders in the new combined entity, each will hope to play host as the preferred location for future satellite manufacturing and launches, raising contentious national sovereignty concerns between the two.
Industry consolidation remains a key theme in the satellite sector given volumes of new capacity being launched (SpaceX’s Starlink, Amazon’s Project Kuiper and Telesat’s Lightspeed), and the decline of legacy broadcast - a troubling burden facing Eutelsat, whose market value has fallen by almost two thirds in five years. With a strategic shift away from broadcast into B2B connectivity anticipated over the long-term, management’s objectives seem well-placed, however with OneWeb’s Gen-2 constellation deployment estimated to cost a massive $4bn and to enter service by early 2028, shareholders shouldn’t hold their breath.
“Bringing together our two businesses will deliver a global first, combining LEO constellations and GEO assets to seize the significant growth opportunity in connectivity, and deliver to our customers solutions to their needs across an even wider range of applications. ” - Dominique D’Hinnin, Chairman (Eutelsat)