In commercial satellite industry circles, merger and acquisition (M&A) deals that will “change everything” are whispered about like a six-mile-wide asteroid tracking too close to the Earth. Will this be the one?
The gossip is almost always more alluring than it is true. Yet, every time an executive like Eutelsat CEO Rodolphe Belmer goes on record stating a desire for more consolidation among global operators, we can’t help but dream about teams of accountants and lawyers banging away on their calculators, trying to breathe life into a historic corporate takeover.
According to Harvard Business Review research conducted over the past decade, somewhere between 70 percent and 90 percent of all M&A transactions fail. Research conducted by global management consulting firm McKinsey & Company between 2013 and 2018, shows that M&A deals involving telecommunications services are about 30 percent more likely to be cancelled than deals in other sectors. “[M&A] cancellation rates in most industries fluctuated from year to year. The communications-services sector proved to be the only outlier,” the firm wrote in its research, adding that communications sector mergers are also twice as likely to face antitrust challenges as mergers in other sectors.
Transactions involving satellite companies face unique challenges, according to analyst Steve Kaufman, a corporate and finance partner and satellite practice co-head at Hogan Lovells. “In order to properly assess the value of a satellite industry M&A transaction, parties on both sides have to be able to answer some tough questions,” says Kaufman. “The technology involved is complex, and rapidly changing. Prices for satellite services and technology are also rapidly changing, but the demand characteristics for those satellite services are often uncertain.”
This feature explores the unusual string of events that led to the demise of three recent M&A deals, which under slightly different circumstances, would have changed the satellite industry landscape (and not always for the better).
“We have a Mexican standoff in the industry right now,” Mike Thompson, a consultant at Access Partnership, told Via Satellite back in June 2018. “Everyone knows that consolidation will happen, but no one seems to want to make the first move until now.”
At the time, Thompson was in the majority of analysts who believed that U.K. satellite operator Inmarsat was ripe for a takeover, which would kick off an expected wave of satellite industry consolidation due to over-investment and falling transponder prices. While Inmarsat’s older generation satellites were generating reasonably steady revenues, the company hadn’t yet capitalized on its newer Global Xpress Ka-band network. Thompson believed that Inmarsat was losing first-mover advantage on Ka-band and would be smart to accept a buyout before Ka- bandwidth prices fell too far.
Echostar was the first to step up with an offer. The U.S. broadcast satellite operator made a series of successful acquisitions in the 2010’s, most notably Hughes Network Systems in 2011, along with Solaris Mobile in 2014 and Helios Wire in 2019. Analysts believed that EchoStar wanted access to Inmarsat’s global Ka-band network to establish mobile connectivity business in the airline and maritime shipping sectors.
But such a move would carry risk for EchoStar, which was still a broadcast company and not familiar with serving mobile transportation industries. According to sources familiar with the negotiations, the prospect of competing with Low-Earth Orbit (LEO) services under development by SpaceX, OneWeb, and Telesat, factored into EchoStar’s decision to proceed. On June 8, 2018, EchoStar put in an undisclosed bid to buy Inmarsat for less than $3.2 billion. We know it was for less than $3.2 billion, because that was the amount that Inmarsat said they received in a follow-up bid a month later — an offer they rejected and described as “very significantly undervalued” and also, curiously, “highly preliminary.”
EchoStar quickly withdrew its bid and the deal fell through. In an August 2018 interview with Space News, EchoStar Chairman Charlie Ergen blamed British takeover laws for the collapse of negotiations with Inmarsat. U.K. Competition and Markets Authority (CMA) regulations require parties of M&A negotiations to make certain details public, including the submission of bids. Ergen told Space News that he would have preferred the details to remain private, and that discretion may have made it easier to reach agreement.
Giles Thorne, Jefferies satellite equity analyst, told Via Satellite at the time that he believed EchoStar’s bid for Inmarsat was less about sector consolidation and more about obtaining leverage in spectrum negotiations, following news that Ligado Networks was on the cusp of getting its license modification reinstated by the FCC.
“There was neither enough overlap nor vertical integration in this sector to make consolidation between EchoStar and Inmarsat particularly synergistic, except in a handful of very select instances,” Thorne said.
Despite rumors that Eutelsat or even Japan’s SoftBank would step in with their own offers, Inmarsat was eventually bought out by a private equity consortium in December 2019 for $3.3 billion. Ironically, Hughes Network Systems would eventually go on to work with Inmarsat in 2020 to utilize acquired assets acquired from OneWeb to do exactly what analysts believed EchoStar was trying to do with an Inmarsat purchase – launch a mobile connectivity service for airlines.
At the beginning of 2020, Comtech Telecommunications and its rival Gilat Satellite Networks controlled a combined 80 percent of the global cellular backhaul market. And, it came to many as a surprise, when Comtech kicked off the new year by announcing an agreement to acquire its Israeli-based competitor for an enterprise value of approximately $532.5 million.
When completed, the Comtech/Gilat combination would create an entity with nearly $1 billion in annual sales right from the start. Gilat’s portfolio of TDMA-based satellite modems and solid-state amplifiers would allow Comtech to firmly establish itself in the In-Flight Connectivity (IFC) market, where Gilat had been scoring deals with Gogo, Honeywell, and Global Eagle. At the same time, the merger would also allow Comtech to expand its existing lead in the more familiar cruise ship sector.
NSR senior analyst Lluc Palerm-Serra called combination a potentially dominant force in the industry. “This, combined with Comtech’s success in November 2019 by reaching an agreement to acquire Canadian ground station company UHP Networks, could create a powerful, technological giant, with dominance along a long stretch of the satellite service supply chain,” Palerm-Serra told Via Satellite shortly after the deal was announced.
Executives on both side of the deal were ecstatic. Comtech CEO Fred Kornberg called Gilat a “perfect match.” Gilat Chairman Dove Varra called the acquisition a “win-win for everyone,” adding that both companies share aligned views of the future.
And then, the COVID-19 pandemic happened.
As if completing an acquisition under normal economic circumstances weren’t difficult enough, the COVID-19 pandemic and the resulting economic fallout created an immediate need for cost-saving consolidation in an environment of high risk and even higher market uncertainty. This led to a sharp increase in M&A premiums (which, according to Deloitte research, had already been increasing steadily since 2014) and a decrease in takeover success rates. According to data provided by nonprofit think tank, the Institute for Mergers, Acquisitions and Alliances (IMAA), the total number of successful telecommunications mergers dropped year-over-year from 712 in 2019, to 531 in 2020 (as of December 1, 2020).
Pandemic travel restrictions grounded commercial airline flights, and with it, Gilat’s IFC revenue. Warning signs quickly emerged that Comtech was experiencing buyer’s remorse and that its relationship with Gilat was deteriorating. Lawyers representing Gilat shareholders started filing lawsuits claiming that Gilat was being undervalued in the transaction. Then, in July, Gilat CEO Yona Ovadia, who was supposed to stay on as CEO post-merger, suddenly resigned.
What followed was a battle of press releases, with Comtech and Gilat accusing each other of avoiding contractual obligations under the takeover agreement, and trying to undermine each other’s business. Comtech finally filed suit against Gilat in mid-July, arguing that it suffered a Material Adverse Effect (MAE) due to the damage the COVID-19 pandemic caused the airline industry. In October, Comtech agreed to pay Gilat $70 million to get out of the deal.
Comtech’s failed acquisition of Gilat serves as an example of how the COVID-19 pandemic will change the way potential buyers value an acquisition. Unforeseen and uncontrollable events can change market conditions on a dime. Therefore, analysts agree that mergers will be more thoroughly scrutinized for many years, or at least until some sense of market stability has returned. In a world without COVID-19, a Comtech-Gilat combination would have had incredible influence on the expansion of mobile broadband and 5G wireless networks.
Where does one even begin with telling the story of how OneWeb and Intelsat almost merged to create the largest and most diverse satellite operator in history? It’s a story with more twists than a ball of yarn and one that ends with both companies heading in completely opposite directions.
In June 2015, just a few months after OneWeb Founder Greg Wyler made his company’s debut with a dramatic presentation at SATELLITE, Geostationary (GEO) giant Intelsat announced a new strategic alliance with the fledgling LEO operator. With promises to launch services from LEO in 2019, OneWeb successfully raised $500 million of funding from a group of investors that included Airbus Group, Bharti Enterprises, Grupo Salinas, Hughes, Qualcomm, Coca-Cola, Virgin Group, and Intelsat. Stephen Spengler, who had just been named Intelsat’s new CEO, told Via Satellite he and outgoing CEO David McGlade started working with Wyler on an investment deal in 2014 after deciding not to explore a merge with then independent Medium-Earth Orbit (MEO) operator O3b Networks.
“We saw the opportunity where there could be interoperability between OneWeb’s LEO and Intelsat’s GEO fleet, both operating in Ku-band, to hit verticals we were targeting for the future,” Spengler explained.
It’s important to remember that 2015 was a pivotal year for established satellite operators. A wave of New Space companies was amassing, backed by powerful venture capitalists determined to bring the Silicon Valley playbook to commercial space.
“The New Space movement brought a tremendous about of energy and speed to the industry,” recalls Hogan Lovells’ Kaufman. “Today’s small satellites are so much more powerful and cheaper than the big systems from several years ago. Intelsat certainly knew back in 2015 that this was where things were headed. They were looking for the best way to stay ahead of this change, while carrying the amount of debt that they had, which limited their options.”
Two years later in March 2017, after watching OneWeb pull in a massive billion-dollar investment from Japan’s SoftBank, Intelsat pulled the trigger on a definitive combination agreement in a share-for-share transaction. SoftBank agreed to buy voting and non-voting shares in the combined company and reduce approximately $3.6 billion of Intelsat’s $15 billion debt pile … if bondholders approved.
Spengler said he we would sell the deal to his bondholders by showing how it would significantly strengthen Intelsat’s capital structure and accelerate its ability to invest in connected vehicle and advanced Internet of Things (IoT) applications. Unfortunately, the argument wouldn’t be enough to satisfy a reportedly wide range of concerns among Intelsat’s investors, who failed to approve the deal by a May 31 deadline. The merger was called off the next day.
Kurt Riegelman, Intelsat’s senior vice president of sales and marketing told Via Satellite at the time that the company’s executives considered the merger itself as a Plan B. The original plan was for Intelsat to adopt some of OneWeb’s capacity to supplement its own fleet.
While disappointed, Spengler and Riegelman vowed that Intelsat would continue working with OneWeb as a strategic partner. This relationship would last less than two years. In September 2019, just days after OneWeb announced a strategic maritime market partnership with Iridium, Intelsat filed a lawsuit accusing OneWeb and Softbank Group of fraud, conspiracy, and breach of contract.
In the end, Intelsat’s bad breakup may have helped the company dodge a bullet. OneWeb filed for Chapter 11 bankruptcy in March 2020, and is now under the ownership of the U.K. government and a Bharti Global-led group of investors. OneWeb has also been sued by launch company Virgin Orbit, which was part of its initial investment group.
Intelsat also filed for Chapter 11 bankruptcy protection in May 2020, but unlike OneWeb, it did so to provide itself the means to the FCC’s accelerated C-band spectrum clearing timeline and receive a $4.87 billion payout. “It’s funny the way things turned out for Intelsat,” remarks Kaufman. “By holding out and not merging with OneWeb, Intelsat will be able to put $4.87 billion of the FCC’s money towards clearing debt, compared to the $3.6 billion that was estimated in the OneWeb/SoftBank agreement. Despite all the headaches, Intelsat today finds itself in a much stronger financial position than OneWeb with a much brighter future. I can’t say that things would have been better for anyone if, in a different place and time, that merger succeeded.”
One of the satellite industry’s leading specialized analysis firms, NSR has provided insight and commentary on some of the most meaningful M&A transactions during the past 20 years. Via Satellite asked NSR President Chris Baugh to explain how he and his analysts calculate the likelihood that a satellite industry M&A will succeed. Baugh shared the following list of what factors into the equation for success:
• We look at the companies' complementarity, in both products and services and in the region where they offer that service so that 1+1 is greater than 2.
• We analyze respective market share before and after the deal to see if it moves the needle overall and by region.
• We assess if the M&A offers the new combined company better footprint and distribution, as well as an opportunity to expand and grow their addressable market.
• We factor in ease of integration of both companies' culture and customer sets.
• We try to determine whether or not the M&A enhances competitiveness, provides a clear roadmap via a compelling go-to-market strategy for the "new" entity, and offers a unique value proposition and market position within and outside the industry.
• We ask: “Does the M&A provide any unique market advantages?” And, “How would the companies’ customers answer that question?”
• We also ask, “Does it seem obvious that the M&A will succeed?”
After years of making these calculations, Baugh says he and his team have identified some common warning signs that an acquisition is likely to fail. Those signs are:
• We find ourselves questioning the basic logic, timing, and cost of the M&A.
• The M&A runs counter to trends we see in the market.
• We see a path for both companies to achieve the same intended results through organic growth.
• The M&A feels desperate or reactionary, instead of focused on value-creation for the customer.
• The M&A combines two or more existing problems, with the potential to compound and exacerbate those problems. Successful M&A more often involves two weak companies that produce one strong entity by eliminating a problem.
• The M&A will likely fail to deliver against synergies.
• We can confidently predict excessive customer complaints and/or churn post-merger. VS