Satellite Financing: Analysts Highlight Need for Greater Transparency

Investment opportunities abound in satellite communications, as excitement around the NewSpace economy builds. But analysts who spoke at SATELLITE 2019’s Monday Morning Finance Forum expressed cautious optimism as they weighed issues such as the buildout of Low Earth Orbit (LEO) constellations, the future of C-Band spectrum allocation and Merger and Acquisition (M&A) activities.

Christopher Baugh, president of consultancy at NSR, kicked off the roundtable-style discussion with the presentation of multiple data points highlighting key growth areas and investment trends. The satellite service business experienced significant growth between 2013 and 2018 (1.3 percent to 14.5 percent), while the satcom supply sector projected to more than double over the next three years (it’s projected to grow 213 percent between 2018 to 2021). Meanwhile, video pricing is expected to drop by 29 percent, along with High Throughput Satellite (HTS) pricing, as the market shifts. “I don’t think that’s a bad thing,” said Baugh.

But while excitement over generally positive growth figures is universal, speakers suggested there are more questions than answers in the satellite industry on several topics — like the future of C-Band, and what spectrum reallocation will mean for the terrestrial wireless and satellite industries.

The C-Band Alliance —formed in 2018 by satellite operators Intelsat, SES, Eutelsat, and Telesat — has proposed making 200 Megahertz (MHz), including a 20 MHz guard band, available terrestrial wireless companies for 5G purposes. But, wireless carriers have advocated for a larger allocation of spectrum to fuel 5G applications. “The investor community is largely interested in C-band,” said speaker Sami Kassab, executive director of investment firm Exane BNP Paribas.

Speaker Ric Prentiss, managing director, Raymond James, added, “Providers have to spend Capex… they have to have a balance sheet,” he said. “Timing is important but it’s not essential that you get all 300 MHz today. Carriers in the U.S. don’t have an unlimited checkbook.”

For both satcom newcomers as well as legacy organizations, navigating the most lucrative opportunities — e.g., HTS prospects, smallsats, mobile constellations — during this transitional period of space activity, will be difficult. There is no clear path as to what today’s disruptive startup will bring to tomorrow’s market.

As Prentiss noted, investors still trying to figure out the opportunities for In-Flight Connectivity (IFC), government, Internet of Things (IoT), and maritime sectors. “People have to look at, do you have a solution there that could be valuable?”

Speaker Giles Thorne, IT hardware and infrastructure, Equity Research, Jeffries Group, suggested that while investors are excited by “doing something new and different,” a constant frustration is the reality that even the best ideas can take 10 to 15 years to bear fruit.

Speaker Nick Dempsey, analyst, Barclays Capital, acknowledged that a few big-name entrepreneurs — presumably Blue Origin/Amazon CEO Jeff Bezos and SpaceX’s Elon Musk — have made satellite investment exciting recently, even that’s not enough to sustain a business over time. “In terms of any large hugely wealthy individuals getting companies and tearing things up, yes, that’s exciting to look at,” said Dempsey. “We have four or five of those guys who see the bigger picture. The question then is, which the applications will bounce out with some success?”

Thorne agreed, noting the importance of balancing fresh ideas with “managing the back book and managing the front book.”

“To have Jeff Bezos talking about innovation is healthy, but there are a number of technical hurdles to get over,” said Thorne.

Because of this, many of the innovators are at a distinct disadvantage, added Kassab. “The issue in the industry is the discrepancy between innovation and the assets and that it takes 10-15 years to realize the asset,” he said.

When asked about future M&A activities from the likes of Intelsat, SES, and others, speakers were hesitant to make predictions about prospective mergers or acquisition. “Intelsat didn’t happen, Gogo talked and nothing happened so there may be a little bit of fatigue from that,” said Simon Flannery, managing director, Morgan Stanley.

But, one thing they agreed on was the need for greater visibility into profits and other metrics.

When asked by Baugh about what he wanted to see from CFOs of startups, Prentiss emphasized the importance of transparency. “It’s really hard to parse through information and see, ‘are you achieving a return on capital?’ and ‘what’s the competitive dynamic?’ Help us understand how you will get to that,” said Prentiss. “The wireless guy, knows … how they operate competitively.’”

Flannery also said financial transparency is also on his wish list. “If you think about a data center company they will list 50 different data centers and tell you how much revenue they get,” said Flannery. “If we had that for every satellite constellation over time … that would be better. To paraphrase Warren Buffet, ‘we’re less interested in what they’re going to do than what they’ve done.’ Taking a ‘show me’ attitude is probably appropriate.” VS