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Inmarsat has been a pioneer of the satellite industry for over 30 years but after shares fell to new lows earlier this year, the company has become vulnerable and had to fight against a takeover bid from US-rival Echostar.
Inmarsat was founded as a non-profit organisation in 1979, privatised in 1999, and listed in London in 2005. It has long been a jewel of the UK economy that has become a global leader in satellite mobile communications. Currently, it is keeping ships, planes and the likes of the British and US military in the loop using its fleet of 13 satellites, including its four Global Xpress satellites that provide the only global high-speed broadband operation in the world.
But Inmarsat has become increasingly vulnerable to bids from international rivals after shares collapsed to their lowest level in a decade. Shares plummeted after its costly transition to its next generation of satellites. Coupled with heightened competition from the likes of SoftBank-backed OneWeb, this resulted in a significant drop in profit last year, with cash flow so strained that the company slashed its dividend by 38%.
French rival Eutelsat mulled making a bid for Inmarsat before quickly deciding against it, and US-based EchoStar followed up with a £3.2 billion bid that was swiftly rejected. Inmarsat has so far stood its ground and fended off the unwelcome interest, believing it can overcome the short-term pressures and prosper as it enters the next decade.
But is one of the UK’s leading satellite company still at risk?
Inmarsat has been transitioning to its next generation of satellites since launching the first Inmarsat-5 satellite in the middle of 2014, signalling the start of its move toward offering higher-speed, more reliable broadband services rather than the likes of satellite phones that industries have traditionally used.
I-3 series: four out of the five Inmarsat-3 (I-3) satellites are still in operation using the L-band network to provide communication and safety services, and are expected to remain in operation until ‘around 2018’.
Alphasat and I-4 series: Alphasat was launched in 2013 and is the largest European telecommunications satellite ever built. This supports its Inmarsat-4 (I-4) series, which was used to establish the world’s first 3G network. These L-band network satellites are not expected to need replacing until the early 2020s.
European Aviation Network: Inmarsat’s S-band satellite was launched last year and will enter operation this year. This will provide high-capacity satellite coverage with a 4G LTE ground network developed by Deutsche Telekom, providing Wi-Fi on flights across the European Union (EU).
Inmarsat-5 and Global Xpress: the company was the first to launch a Ka-band satellite that can deliver high-speed broadband to terminals on land, at sea, or in the air. This network is delivered through Boeing-developed Inmarsat-5s, with four now in operation since the first was launched in the middle of 2014.
This transition has not been smooth for Inmarsat, as revenue from its older fleet of satellites started to decline before its new fleet had time to properly kick in. That was compounded by a flood of network capacity entering the market just as Inmarsat launched its Ka-band network, as established players like SpaceX and newer entrants like OneWeb started to chase the same opportunities as the London-listed firm. Many of Inmarsat’s peers have moved away from serving the fixed satellite space as revenues from providing video and telecoms services started to decline, prompting them to enter the mobile satellite space that Inmarsat concentrates on.
Launching a new generation of satellites does not come cheap, but Inmarsat has spent heavily in the knowledge that it can gain a lead in new markets, such as providing in-flight Wi-Fi to passengers travelling by plane. But as spending climbs higher Inmarsat is having to battle on pricing as competition intensifies, stretching its margins.
Inmarsat managed to grow revenue in 2017 largely thanks to its growing aviation business, but profit declined for a second consecutive year, falling by almost a quarter after its margin dropped back to levels not seen since it launched its new fleet of satellites.
With much of Inmarsat’s future strategy pinned on the aviation unit, concerns about the division’s margins started to emerge late last year when Inmarsat warned it would achieve a rate of about 40% in 2018 – way below the expected margin of about 48%, and demonstrating the aggressive battle on pricing in the market. Woes about revenue also arose, as the growth in the second half of last year was only about half the rate seen in the first.
Two new satellites were launched in 2017, helping push net debt even higher by contributing to the squeeze on cash that saw Inmarsat report a $166 million net outflow last year. That, combined with the uncertainty over payments from its partner that utilises Inmarsat’s L-band spectrum in the US, Ligado Networks, prompted the company to slash its dividend to just 33.62 cents from 53.96 cents in 2016 – warning that the pay-out will be cut even further in 2018 to just 20.00 cents, and remain at that level until cash flow recovers.
|Operating cash flow||614.8||653.4||717||805.5||774.4|
|Free cash flow||(84.4)||150.1||132.4||274.5||41.2|
|Net cash flow||(288.2)||(80.5)||(56)||53.4||(166.4)|
The cut to the dividend has also been made so Inmarsat can continue investing in its fastest-growing business (that it sees as key to its future over the medium term): providing in-flight connectivity to the aviation sector. While being important for Inmarsat’s longer-term prospects, this will not speed up the recovery in cash flow over the coming years.
Inmarsat shares hit an all-time high of £11.51 in December 2015 after gaining momentum following the launch of its new Global Xpress fleet, but have gradually fallen since. Inmarsat shares dived to just 334.3 pence in early April 2018 – it’s lowest since October 2008.
Shares were further knocked at the start of May when Inmarsat became the first London-listed company of the year to face a shareholder revolt over the board’s pay package, with 60% voting against the non-binding vote on remuneration at its annual general meeting, up from 49% the year before. That followed similar revolts at its annual general meetings (AGMs) in 2012, 2013 and 2015.
Shares have since rebounded as talks of a takeover circulate, but still trade way below their peak.
While higher competition, contracting margins and deteriorating share prices often sparks consolidation among many industries, the unique fragmented nature of the satellite sector means consolidation is less likely. This is because the amount of synergies that a merger could provide is expected to be low, with the ability to cut spending and costs the only obvious benefit.
Still, Inmarsat’s chief executive Rupert Pearce, aware of the rapid fall in share value, warned last November that Inmarsat could become vulnerable to a takeover. Rumours about a possible bid for the company have circulated for the last couple of years.
Eutelsat Communications, a French firm equipped with 38 satellites, said in late June it was considering making a bid for Inmarsat, before deciding against the decision the very next day.
Having already started developing its own Ka-band satellite that it hopes to have orbiting in 2021 and rivalling Inmarsat’s new fleet, Eutelsat’s short-lived interest in the London-listed firm was a surprise to the market, particularly as it is burdened with over $3 billion worth of debt.
Echostar, the US satellite communication company led by Charlie Ergen, is thought to have had its eye on Inmarsat for a while and, after its initial approach in May was swiftly rejected, it launched a cash and share offer for Inmarsat worth a total of £3.2 billion (£2.45 billion excluding convertible bonds) in June.
Echostar’s improved offer was worth the equivalent of £5.32 per share, a 46% premium to Inmarsat’s closing share price before the first approach was made. Echostar was hoping to woo investors by allowing them to realise some of their investment in Inmarsat while retaining a holding in the new enlarged business. Inmarsat shareholders would have held about 28% of the new merged business under the deal, but Ergen would have kept his grasp over the company.
But Inmarsat again turned down the offer, claiming it was far below what the company is worth, and because the offer was made in dollars it was subject to foreign exchange movements. Echostar then decided not to pursue Inmarsat, dropping its bid earlier this month.
Echostar is now no longer able to make a new bid for Inmarsat for the next six months unless circumstances change, for example, if Inmarsat invites an offer or a another bidder emerges. Interestingly, that means Eutelsat could re-enter following Echostar’s approach, but it is seen as unlikely because the French firm could be out-muscled by more cash-rich companies like Echostar, which has over $3 billion in cash to make mergers and acquisitions (M&As) more feasible.
There is also the added risk that private equity groups could begin to circle if Inmarsat’s share price falters any further.
Echostar argued that a tie-up with Inmarsat would combine the pair’s ‘complementary assets and service offerings’, but analysts believe there is little rationale in terms of realising any synergies between the two businesses. Although both Echostar and Inmarsat have satellites providing L-band and S-band network services, they both largely avoid one another by providing different products to different customers. With this in mind, many argue the only benefit would be the ability to cut capital expenditure and investment, and whether that is enough to motivate Echostar’s bid.
However, it is thought that Echostar’s interest is centred on Imarsat’s presence in the US and its partnership with Ligado. Ligado, the US satellite company that was formerly named LightSquared, previously failed to deploy its original wholesale 4G LTE broadband network across the US, sending it into bankruptcy. But having recovered and resurfacing in 2015, Ligado has relaunched itself as a new mobile carrier, supported by Inmarsat’s L-band spectrum.
The problem is, Ligado has been waiting to be awarded the license that would allow it to launch its mobile carrier business and begin expanding its services in the US, which is the cause of uncertainty over payments to Inmarsat over the coming years. While this has the potential to prolong Inmarsat’s recovery, it could also end up becoming a catalyst for the company if Ligado secures the all-important licence sooner than expected.
If Ligado secures that licence then it can, with the help of Inmarsat’s spectrum, mount a serious challenge to Echostar’s sister company Dish Network, also owned by Ergen. Having spent tens of billions of dollars on building up its own spectrum in the US in recent years, Ergen could be looking to buy Inmarsat in order to protect Dish’s interests in the US by taking out the threat posed by Ligado. Interestingly, Ergen was also once a holder of Ligado’s debt, which led to reports that he went after Ligado’s US spectrum capabilities during bankruptcy proceedings.
Dish may have a significant spectrum holding in the US but it is struggling to roll out its wireless network after failing to secure a partner, and yet it’s supposed to cover 70% of the US by March 2020. For this reason, Dish has itself been seen as a takeover target, most recently by Verizon and others such as T-Mobile.
Although buying Inmarsat and securing its US spectrum would not aide Dish’s problems with rolling out its wireless network in time, it would help prevent firms like Verizon being able to look for other partners (such as Ligado), which in turn would strengthen Dish’s bargaining power with regulators if it fails to meet deadlines.
Additionally, while Inmarsat is a UK firm that serves the likes of the British military, the vast majority of its business comes from outside of the UK. The US military is its biggest individual customer, which is likely to appeal to Echostar as the US is its home turf.
Politics is increasingly interfering with business and M&A activity. While US President Donald Trump has been happy to use business as a pawn in his trade war with China, flexing his muscle over Chinese firm ZTE for example, the UK failed to take decisive action as staple stocks like semiconductor maker ARM Holdings and Dairy Milk maker Cadbury’s were bought by foreign firms.
The current Conservative government pledged to ‘protect our critical infrastructure’ under its latest manifesto and with Brexit talks still up in the air with the deadline fast approaching, the risk of the country’s leading satellite company falling into foreign ownership is poignant.
Although the European Space Agency (ESA) is developing the EUR10 billion Galileo satellite navigation system independent of the EU, the UK’s future role in the ESA post-Brexit is still up for debate. The UK plays an outsized role in the global space sector and Inmarsat is the authority on several key technologies key to aviation and maritime safety. The imminent launch of its European Aviation Network also strengthens Inmarsat’s ties to the bloc.
The Galileo satellite system will rival the US government-controlled Global Positioning System when it comes online in 2020, not long after the UK is planned to have left the EU, serving everything from smartphone coverage to military applications. But, as you would expect in any negotiation of this size, this invaluable asset is now being used as a pawn as both sides argue over their future relationship.
The EU is leveraging Galileo by keeping the UK in the dark on security grounds, claiming it shouldn’t be allowed access to ‘need-to-know’ information. The UK argues it has been a key part of Galileo’s development, ‘particularly the delivery of payloads for satellites, the ground control segment and the development of the Public Regulated Service software’.
It is fair to assume that Inmarsat would have to be seen as a company of national importance to the UK amid the current political environment, even if the UK government has not specifically stated it. Inmarsat may source over 90% of its revenue from outside of the UK, but the British army is still a key customer.
This political environment means that if any takeover of Inmarsat was to succeed then it cannot be a hostile one. With the government not short of reasons to block any takeover, any bidder would have to at least win the support of the Inmarsat board in order to convince regulators that a merger was the best move for everyone.
Inmarsat may be adamant that it is not for sale for now, but this position also gives the company leverage that it can work in its favour and, at the bottom line, every company has its price. Analysts from RBC Capital have suggested a price of at least £7.50 may be required to gain a recommendation from board. That would be 41% higher than Echostar’s bid and more than double the closing price of Inmarsat shares the day before Echostar made its first approach.
Inmarsat is confident in its own strategy to start delivering growth when it enters the next decade, even if that means navigating through a tough couple of years that will see margins continue to come under pressure, high spending and (for shareholders) lower dividends. Its performance in the first quarter (Q1) of 2018 matched that of last year, with revenue rising and earnings falling. The Aviation unit reported a 39% year-on-year rise in revenue, signalling slower but still impressive growth from the division.
Its new generation of Global Xpress satellites is at the heart of Inmarsat’s strategy. The firm is currently in phase two of its Global Xpress roll-out, with the hope of completing its plan in 2019 or 2020.
Inmarsat expects to spend between $500 million-$600 million each year between 2018 and 2020, as investment in Global Xpress continues, before it moderates as it completes its plan. Free cash flow is expected to steadily improve over the medium term. Revenue is expected to be running at annual rate of $500 million by the end of 2020 compared to the $142.3 million delivered in 2017 and the $78.5 million in 2016.
Inmarsat’s overall revenue will continue to grow by mid-single digit percentages over the next five years (excluding Ligado), with 2018 revenue to be between $1.3 billion and $1.5 billion. EBITDA will also steadily improve over the coming years.
Maritime is currently the biggest driver of both revenue and earnings for Inmarsat, but aviation will continue to form a larger part of the business as time goes on. Maritime accounted for 49% of EBITDA in 2017, followed by government at 30%, aviation at 11% and enterprise making up the remaining 10%.
Having signed deals with the likes of Lufthansa, Inmarsat’s aviation division has over 1300 aircraft under contract and 200 installed terminals compared to just 300 under contract and 20 installed aircraft at the end of 2016, demonstrating the rapid growth being delivered providing in-flight connectivity. The launch of the European Aviation Network this year will play a major role in expanding its Aviation business.
In Maritime, Inmarsat is looking to make a ‘major market capture’ of the larger vessel market using its newer Fleet Xpress service that is based on its modern Global Xpress satellites. There are currently 20,000 ‘VSAT/high-bandwidth’ vessels in the market worth about $500 million in retail value to the satellite and communications industry, but that is expected to double to 40,000 vessels worth $1 billion during the 2020s, growing considerably faster than Inmarsat’s other maritime markets.
Meanwhile, it will look to maintain its market-leading position in the mid-sized vessels market, with its FleetBroadband offering having migrated its customers to the Fleet Xpress service last year, despite expectations for the market to contract over the coming decade.
An integral part of Inmarsat’s maritime strategy is based around the ‘Global Maritime Distress and Safety System’, or GMDSS for short. GMDSS is the key communicative system used by ships in emergencies, and therefore it must have near-perfect uptime and connectivity (99.9%). Inmarsat has said it is aiming to gain next generation GMDSS approval for its FleetBroadband service ‘ahead of the competition’, which would help it in its efforts to drive price improvements, attract customers and maintain its market leading positon.
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