SoftBank cash brings Intelsat and OneWeb to the merger table
February 28, 2017
PARIS — The intended merger of satellite fleet operator Intelsat with start-up Internet satellite constellation operator OneWeb, financed by SoftBank, offers Intelsat something it has not had with its previous acquirers: real investment rather than a piling on of more debt.
Whatever the merger’s challenges — persuading bondholders to accept below-par value, figuring out how to work with a risky start-up whose debt is going up as Intelsat’s goes down, and generally taking the measure of OneWeb’s $3.5-billion satellite constellation business — the de-leveraging is a clear plus.
Intelsat said the $1.7 billion investment foreseen by SoftBank should bring Intelsat’s debt-to-adjusted EBITDA level down from today’s 8.8 times to 6.6 times. From that lower level it should be easier to make its way down to less than four times. Post-merger, SoftBank will be Intelsat’s biggest shareholder, with 39 percent.
$1 billion in interest payments due in 2017
Intelsat’s current debt totals $14.5 billion even after multiple bond exchanges, most of it the legacy of successive leveraged buyouts in the past two decades. For 2017, it is scheduled to pay about $1 billion in interest payments alone.
More than any other reason, it is the debt level that has given Intelsat the image of a large tree in the satellite telecommunications forest that may fall at any time, threatening lots of collateral damage.
Intelsat had already invested $25 million in OneWeb in 2015 in return for exclusive distribution of $100 million of OneWeb capacity to aeronautical and maritime customers, U.S. government sectors, the oil and gas industry and cellular backhaul networks.
The post-merger company will maintain two separate divisions, OneWeb and Intelsat, with Intelsat receiving a commission for selling OneWeb bandwidth.
OneWeb founder Greg Wyler, who will be executive chairman of the merged company, said SoftBank’s goal is to disrupt the entire sat telecom industry and to be the “master distributor for all of OneWeb's capacity.”
Wyler updated the Feb. 28 investor call on OneWeb’s status. The company’s $1.7 billion on equity, including a previously announced $1 billion from SoftBank, will be followed by an equivalent amount of debt.
The first 10 demonstration satellites will be launched in March 2018, by which time the OneWeb two-production-line factory in Exploration Park, Florida, should be operational.
Five months after the first launch, following in-orbit testing, OneWeb should be ready to produce three satellites per day and to be launching every three weeks, 32 satellites per launch, on Russian Soyuz rockets negotiated through Europe’s Arianespace consortium.
Wyler described the constellation as 882 satellites but said plans were under way to increase that at some point. In a statement that might have raised eyebrows at Intelsat, Wyler described OneWeb as essentially an endless capex program: the more satellites, the better the performance. He dodged a question about OneWeb’s specific business model, saying it was commercially sensitive.
SoftBank Chief Executive Masayoshi Son had already made clear that he was “all in” on OneWeb, citing performance metrics to SoftBank investors that exceed OneWeb’s own forecasts: http://bit.ly/2mi1sxn
Intelsat Chief Executive Stephen Spengler said merging with OneWeb will offer multiple synergies and capex savings for Intelsat, but neither he nor Chief Financial Officer Jacques Kerrest gave any clear examples of what these might be.
Kerrest said Intelsat would not confirm previous estimates of its 2017 capex since this might change as the OneWeb transaction develops. OneWeb and Intelsat expect that regulatory and bondholder approval could come as soon as September.
One of the merger’s principal assumptions is that Hughes Network Systems, a OneWeb ground segment supplier and, like Intelsat, a small investor, succeeds in designing a network that passes signals between satellites in polar orbit at 1,200 kilometers in altitude and Intelsat’s fleet of geostationary satellites at 36,000 kilometers in altitude over the equator.
Kerrest also declined to specify the terms of the bond repurchase that is being financed by SoftBank.
Intelsat’s debt-bed conversion to LEO and consumer broadband
OneWeb’s business depends on lots of things going right. User terminal and fixed and mobile antenna costs need to come down to where rural markets in poor countries can afford them. Nations with poor records in allowing satellite broadband within their borders will need to find exceptional benefit in OneWeb to give the company landing rights.
OneWeb has often headlined its low latency — the round trip between a satellite and a user — as a hefty advantage. But industry analysts remain divided over whether latency-sensitive markets are big enough to justify such a large investment.
Until Feb. 27, Intelsat was among those skeptics. It dropped its previous investment in consumer satellite broadband in the United States, and loudly declined to invest in O3b Networks, a medium-Earth-orbit constellation of Internet delivery satellites now owned by Intelsat’s biggest rival, SES.
Now it proposes to merge with a company whose primary focus and reason for being — in the eyes of founder Wyler — is bridging the digital divide to the 4 billion people currently without Internet access.
The previous OneWeb chief executive, Matt O’Connell, said soon after taking the job that priority one was providing small businesses with connectivity. Only when this business was stable and profitable could terminal costs be brought down to affordable levels for those currently off the telecommunications grid. He left the company after less than a year.
Peter B. de Selding