Yet more consolidation afoot in the satellite industry — a sign of how satellite providers are hoping to build a more cost-effective model to deploy and operate satellite services in the future. Today, OneWeb — which last December raised a whopping $1 billion from SoftBank for its yet-to-launch satellite internet service — announced that it would merge with large satellite incumbent Intelsat. SoftBank separately said it would invest $1.7 billion in the combined company (on top of its previous investment in OneWeb). The deal is valued at $13 billion, counting both equity and debt, according to a source.
To note: this valuation is subject to a successful debt exchange: this deal, Intelsat said, should reduce its debt load by $3.6 billion, leaving it with about $11.4 billion of debt. (Intelsat had around $15 billion of debt prior to this deal.)
On its own, Intelsat, which is traded on Nasdaq, currently has a market cap of $740 million, and its shares are trading 6.8 percent down today. The company today also released its fourth quarter and full-year earnings, which noted $551 million in revenue and $417 million in Adjusted EBITDA.
Intellsat was one of the first investors in OneWeb when it was first founded, and the two plan to merge their fleets, said Stephen Spengler, CEO of Intelsat, in a conference call today, creating a combined fleet of around 1,000 satellites when OneWeb’s fleet is fully launched. The deal, if approved by all shareholders and regulators, is expected to close late in the third quarter of 2017.
Intelsat has been around since 1964, originally formed as an intergovernmental consortium to build satellite communications systems. Its move into operating as a publicly-listed company, and its huge debt load, are signs of how investors (and the industry) see a lot of opportunity in the sector to provide an additional layer of communications services, but also of how the costs and business models of the satellite industry are complex and still need more economies of scale and other efficiencies to fly (literally and figuratively).
To wit, this is the third big satellite M&A move in the last month that also point to this trend. Others have included Google selling its Terra Bella (Skybox) business to Planet, and DigitalGlobe combining with MacDonald, Dettwiler, and Associates.
The logic of this move is to bring some of OneWeb’s newer technology using low-earth-orbit (LEO) satellites with some of the scale and breadth of Intelsat’s bigger business which is based on a geosynchronous-earth-orbit (GEO) fleet.
The Intelsat fleet has a higher orbit than OneWeb’s — some 30 times higher — and combined with OneWeb’s newer technologies, it makes for a lower latency for its service to devices on earth, but using the higher orbit for backhaul, OneWeb’s CEO Greg Wyler noted.
“It’s LEO plus GEO,” as Wyler described it on the investor call today.
The aim for doing all this is to bring a new kind of faster satellite-based wireless Internet service to the market.
There are a few use cases for this. One is to be able to provide broadband in markets where there is little or no fixed broadband infrastructure, and where even wireless networks (which are cheaper to build than fixed networks) lack backhaul.
Another is to offer broadband to a wider public to compete with other fixed and wireless services today. And the third would be to fill in connectivity for the rising demand for the next generation of wireless services, specifically 5G and IoT connected thing deployments.
“We are not competing with 5G but complementing it by providing fill-in backhaul,” said Spengler.
Traditionally, satellite internet services have been too expensive and therefore cost-prohibitive for anything but a narrow set of use cases, working with businesses and organizations that need the communications access enough to be willing to pay the price.
Intelsat already offers a lot of backhaul services to carriers and enterprise customers. The combination here of these two businesses will, in theory, bring these costs down to fill in the three use cases detailed here.
“This is about new growth and supporting new customers,” Spengler said.
However, the proof will be in the pudding: it’s still too early for the combined company to talk pricing and what would be included in packages. And there is some significant infrastructure that still needs to be put in place: OneWeb is scheduled only next year to make its first big launches to build out its fleet of 900 satellites. That plan is still on track, the company said during the conference call, although the ground breaking for a factory to build these has been delayed.
“We believe that combining Intelsat with OneWeb will create an industry leader unique in its ability to provide affordable broadband anywhere in the world. As an early equity investor in OneWeb, we recognized a network that was a complement to our next-generation Intelsat Epic fleet and a fit with our long-term strategy,” said Spengler in a statement.
“By merging OneWeb’s LEO satellite constellation and innovative technology with our global scale, terrestrial infrastructure and GEO satellite network, we will create advanced solutions that address the need for ubiquitous broadband. The transaction, including SoftBank’s investment, will significantly strengthen Intelsat’s capital structure and accelerate our ability to unlock new applications, such as connected vehicles, as well as advanced services for our existing customers in the enterprise, wireless infrastructure, mobility, media and government sectors, while also reducing execution and other risks.”
“OneWeb has made incredible technical progress over the past year, and has itself attracted significant investment from SoftBank,” added Wyler in a statement. “With SoftBank’s support we will build the world’s first truly global broadband company, accelerating our mission of bridging the digital divide by connecting the four billion people without access today. While there are numerous growth paths available to OneWeb, we are very excited at the prospect of working with Intelsat on this shared objective.”
As for SoftBank’s investment, it is a progression on the company’s bigger strategy to invest big into broadband satellite internet services, as a complement to its other moves into the communications space, such as acquiring Sprint in the U.S. The company has been putting a lot of investment activity into larger communications infrastructure plays in the last couple of years, and that includes hardware. In 2016 it also acquired ARM, a key designer of processors for wireless services, in the UK for £24 billion (or the equivalent of $32 billion at the time of the deal closing).
“We are in the midst of a technological revolution and, provided we receive the necessary cooperation from Intelsat bondholders, we welcome the opportunity to support OneWeb as it creates the foundation for next-generation global internet services anywhere on the planet,” he said. “This combination is consistent with SoftBank’s strategy of investing in disruptive, foundational technologies that are building the infrastructure for tomorrow, and this proposal offers a win-win opportunity to accelerate OneWeb’s mission while enhancing the Intelsat balance sheet.”
Updated with more detail from the company’s call with investors and media.