SINGAPORE — In 2018, satellite ground terminal manufacturer Newtec, after several years of double-digit growth, decided it needed more heft given the changes in the business.
The initial idea was that a private-equity investor would fill the bill. Instead, Newtec agreed to its purchase by ST Engineering of Singapore.
ST Engineering’s purchase of Newtec, for $286 million — 2.7 times revenue and 14.6 times EBITDA: http://bit.ly/2KPiN0P — is expected to close by the end of this year and will make Newtec a sister company of its onetime competitor, VT iDirect, which has been part of ST Engineering since 2005.
Newtec Chief Executive Thomas Van den Driessche said much of the commercial satellite communications sector — including satellite operators and service providers — needs a good dose of M&A. Newtec, he said, is showing the way.
Is fitting inside ST Engineering alongside iDirect going to be a challenge?
I don’t think so. Today we are in the merging control period, which we expect to take 4-5 months, with the acquisition before European and U.S. regulators, among others. The U.S. one typically takes the longest. We expect the close to be late this year. We are very restricted as to what we can discuss with iDirect because of anti-trust concerns.
What about ST?
It’s less restrictive because we have the confidentiality of the NDA. We can discuss strategy.
Newtec has been successful. What argues in favor of being acquired by ST Engineering?
We’ve gone through a five-year period with a growth CAGR of around 18%. It’s obvious we can continue organic growth the way we have been doing for another two years.
However, the challenges and opportunities that are beyond 2021 are huge. Designing and building ground segment for constellations is a lot of engineering and deployment work and intense capex. They’re big projects. We had encountered similar periods, like around 2013 when we were beginning our multi-service VSAT operations and we wanted to go into multi-service HTS satellites, the non-pure consumer-designed ones.
And we were confronted with the fact that these full-platform GEO HTS projects were maybe 10, 20 or 30 million dollars of ground segment costs to start.
When you’re a 50-million-euro company and you want to sign a 30 million dollar deal, that causes some problems. We moved on, but still, when you have 120 million in revenue and you want to sign a 120 million deal, that also causes some problems.
So even though our organic growth was going great and looked like it would continue to 2021, we wanted to be prepared for what comes beyond that point. We came to the conclusion that we needed non-organic growth next to the organic growth.
We started the process to find private equity to do a buy and build strategy, but we soon concluded that first of all we needed a pretty big private equity investor to acquire a company.
A little debt too, maybe?
That’s the risk. But we also came to the conclusion that it’s a very risky and time-consuming effort that may not bring what you want.We want to have enough critical mass to tackle big programs when they arrive. Acquiring other companies and growing them and integrating them may not get to that critical mass in time.
Did your exercise presume LEO broadband constellations in the next few years?
It presumed an enormous amount of potential that would cause a lot of work. So it could presume a LEO program with a $100 million ground segment. We were very proactive at 2018 and early 2019, saying we need to do something which is more than organic growth. This growth curve that we have is going so nice and linear, but it’s not going to last forever. So while we didn’t have to do anything immediately, we were going to have to change the strategy and increase our critical mass.
There are many things going on at the same time — virtualization and cloud services, all these vertical markets you need to cater to, IFC, maritime, government, 5G, cellular backhaul — together with new platforms for constellations.
We had to be big enough to cope with all of them or we weren’t going to play.
So you set out for private equity, and ended with ST Engineering. Did they find you or did you find them?
There were a lot of strategic players that found out we were on the market for private equity, which meant that our shareholders were at least willing to give a portion of their shares. We got contacted by a lot of strategic players.
Our view is that by merging Newtec with the satellite communication activities of ST, we immediately have the right size to tackle the things we want to tackle.
Is your strategy going to require ST investment?
It’s more about critical mass and capabilities. We have 400 people now. Combine the number of activities with them and you have 1,000 very capable engineers in the satellite industry. Even without new investment, your capabilities are just higher. What you need to do is not necessarily more, but you simply have more people.
The Yahsat broadband agreement with Hughes Network Systems in the Middle East has now been extended to Brazil. Is that going to affect your Brazilian work with Yahsat?
A: We presume so. It’s also a JV, which will take some time before it actually comes into effect. In the meantime, of course we have our activities with Yahsat that are going quite well. The ramp-up of terminals being deployed for them in Brazil is good.
Q: It sounded like Hughes needed Yahsat’s presence in the Middle East, and Yahsat needed Hughes in Brazil.
Hughes needs the Yahsat satellite as well because they don’t cover the whole of Brazil on their own. I can only say that our cooperation with Yahsat is good in Brazil. The ramp-up is going to lead to quite a big installed base by the time the JV is approved.
So there’s an incentive not to replace all that hardware.
Well, we’re not going to change it out, that’s for sure!
What happens at that point?
It’s up to Yahsat to make those decisions. I talked to Masood [Yahsat CEO Masood M. Sharif Mahmood] and it sounded like a good idea in terms of business logic. If they think it’s really good for their business, then it’s a good thing.
The financial stresses of the in-flight-connectivity providers have eased a bit. Here too you think consolidation would be a good thing?
There are maybe 700 service providers in different markets, geographically and by market segment, and at least 26 satellite operators — probably more, but 26 that have more than national footprints.
The industry likes diversity. You heard SES Chief Executive Steve Collar say there are seven satellite industry associations, which he said is six too many.
I’m president of one of them. I wonder if SSPI counts as one of those…. The point is if you think about the future and how you position yourself, there’s probably more of these people in the ecosystem that should make a move.
You’re including IFC, maritime service, hardware providers?
Everybody, including satellite operators. I see good things happening, for example the investment in LeoSat by traditional satellite operators to make sure there’s some kind of play. I like the idea.
I wasn’t opposed when Intelsat wanted to merge with OneWeb, which by itself wasn’t a silly thought. It didn’t work out, but the idea had merit.
The idea that somebody with 55 traditional satellites and some very nice HTS satellites, the Epic class, would merge with a MEO/LEO constellation is not a bad idea at all.
There are some 20 LEO constellations, include IoT and other narrowband applications, that are being designed.
There must be other people that think that they need to do something. We were doing fine and still thinking we needed to do something to move us to the next level.
You see Newtec as a natural fit inside the broader ST business?
Yes. There’s more than one or two companies. ST activities include satellite communications as well. We really want to combine the strengths of these companies.
And in your management team, nobody’s unhappy with this?
Le’s return to in-flight connectivity and consolidation. Ku-band provider Panasonic Avionics struck an agreement with Inmarsat’s Ka-band Global Xpress service. Do you understand it?
I like Panasonic, they’re one of my biggest customers. I understood the Inmarsat agreement it when they explained it to me. Airlines want to have a certain coverage and they don’t care whether it’s Ku or Ka. There is a complementary nature to the two networks, which makes sense.
But then you’d need complementary on the aircraft with Ku- and Ka-band terminals, no?
Yes, but it’s not necessarily only about single aircraft, it’s sometimes about an airline, which may have regional aircraft that fly here, and international routes that fly there. The international may fly in Ku and the regional in Ka. If somebody wants to be on the front as the interface with the airlines, somebody has the service people for installations, and the other party may have a global network which is complementary. There are multiple aspects to this which kind of makes sense. Of course the proof of the pudding is in the eating.
It’s not that Panasonic has concluded that Ka-band is the future, or that Inmarsat thinks Ku-band will be around a long time?
No, I don’t think so. Some things you would think are obvious because it’s Ka-band are not necessarily the case.
An operator recently said it was having trouble finding a Ka-band slot.
Yes, and the Ka-band on this particular Inmarsat constellation does not have have a huge amount of throughput.
Panasonic is doing quite well in terms of their backlog and in terms of their vision on how many planes they have and how many they are outfitting. They’re moving fast.
Panasonic Avionics’s IFC market share over the last five years hasn’t changed much?
They have a dominant market share. With their capabilities and our platform and scalability, their deployment is higher now. It’s not just how many contracts you have, it’s also about how fast you commission an airplane onto a network. You need a lot of ground personnel to do it and they have the capabilities and also the scalability needed.
Whether it’s line-fit and put it into service or its a retrofit, they have all the capabilities and they have the network to support that roll-out speed. They don’t have a blocking factor, where the others definitely do.
I thought the blocking factor was the airlines not wanting to take their craft out of service.
That’s one factor, but Panasonic is the most capable company today in fulfilling their backlog, which is one aspect of market share — how fast are you signing up new contracts. The other is how fast can you put them in service. And Panasonic is the most capable one today to put them in service, more capable than any of the others we talked about.
Where are you with Eutelsat?
We see Eutelsat as a strategic partner and we’d like to move forward with them on everything from their media side, their fixed data side, their maritime and IFC ambitions and if possible also the broadband side too.
Is the ground segment still open on Eutelsat’s Konnect HTS and VHTS broadband programs?
The broadband is still to be defined. They do have Hughes as a mission partner, although not necessarily for the VHTS. And they’ve had them from before because they are using Yahsat capacity as well with HNS.
China’s aero IFC and maritime markets seem to be opening a bit.
You have to have really good partnerships in China to get the deals done. A lot of them are in some kind of joint venture or partnership. We see a lot of activities on the maritime side, a lot of potential, with more than 100,000 fishing ships.
The ecosystem in China is quite interesting. They have online markets, Alibaba style, for fresh fish. One of the initiatives is to connect the shipping codes to the exchange, to make sure the supply and demand is synchronized.
Would they agree to go outside China for that service?
To buy technology, yes. They have enough satellite capacity.
Does having ST Engineering along help you in China?
I think it does. We’re a European company by nature, and we’re a global player. iDirect is a U.S.-based global player. Then we’ve got a Singapore home. So we’ve got three regional HQs, which has helped our global presence. ST technology, and the relationship they have with other regions, is fantastic.
ST has wonderful technology. They’re in technology for harbors, port authorities, airfields. That’s obviously going to help.
Do you believe in the LEO broadband business model?
I don’t think there’s a good business case to start a LEO in the short term to do consumer broadband. But there’s good reason for just about every other market.
What’s one market that cries out for a LEO broadband solution?
The maritime industry can really use LEO capabilities, that’s clear, given that the LEOs cover the oceans pretty well.
Couldn’t a GEO operator can put up a satellite over the oceans if there was demand?
Yes, but on the other side if there’s a LEO constellation there and the economy of scale is such that it provides terabits over the ocean at a certain cost, and maritime and aircraft have the right equipment on board to connect to them, which is likely in the future, then it looks good.
There’s still some work to do on the antenna side.
If you look today at the antennas being supplied to maritime activities, they’re really trying to be forward compatible. That’s a word we’ll hear more. There are modems as well, they’re software defined and trying to be forward compatible with both GEOs and LEOs. That’s new.
Anything on the antennas side in the last year struck you?
I see a lot of discreet efforts, I don’t see anybody coming out, really.