Intelsat + OneWeb  = True Love or a Shotgun Marriage

 

It’s well known that Intelsat and OneWeb announced plans to merge, backed by a $1.7 billion investment from SoftBank. This adds to SoftBank’s investment in the satellite sector, following it’s the December 2016 announcement of a $1 billion investment in OneWeb. What’s not well understood is why this deal is happening? What’s in it for each party? This post explores the possibility that the transaction was essentially forced upon OneWeb by SoftBank, its largest shareholder. To be clear, this post is a speculative interpretation of the limited public information currently available. We hope more information will become available, perhaps during this week’s Satellite 2017 conference in Washington D.C.

The Intelsat/OneWeb transaction makes obvious sense for Intelsat

Intelsat’s current capital structure combined with rapidly falling prices for satellite capacity is unsustainable. It’s now fairly clear that Intelsat EPIC won’t provide the promised sustained revenue lift needed. As is, an Intelsat restructuring almost inevitable – probably around the end of the decade when large debt tranches come due. SoftBank’s $1.7 billion investment will allow Intelsat to modestly de-lever its balance sheet. Satellite capacity from OneWeb may allow Intelsat to reduce future satellite capX by moving some of its network services customers to OneWeb instead of replacement Intelsat satellites. Additionally, OneWeb revenue could also help service Intelsat debt in addition to its own. The cumulative effect of these factors might help Intelsat convince its creditors to refinance and avoid a restructuring. If SoftBank is sufficiently impressed with Intelsat/OneWeb’s progress, they might even extend their own financing as they have done with Sprint. Frankly, this deal is probably Intelsat’s only shot of avoiding restructuring.

No Apparent Benefit for OneWeb

But what’s in it for OneWeb? It had SoftBank’s previously provided financing and capacity purchase agreement for most or all of OneWeb’s capacity (the terms of the agreement are vague in public documents). With this in hand, OneWeb was likely in a position to get debt financing for most of the rest of their remaining capital needs. Moreover, the capacity agreement left OneWeb with minimal marketing concerns, at least for a few years. Given this background, there appears no benefit for this dynamic new entrant to want to partner with an over-levered company whose revenue is in a long-term secular decline.

SoftBank’s Motivation is Clear

The key to understanding the proposed merger appears to be that the transaction seems highly beneficial to SoftBank. The deal could allow SoftBank to effectively offload a large portion of the risk from its commitment to buy OneWeb capacity. SoftBank is not a satellite capacity distributor and does not appear to have the resources to resell the OneWeb capacity it committed to buying. Intelsat has a global distribution network, much of it focused on network services traffic and disproportionately in developing countries with the greatest need for OneWeb’s services. Of course, Intelsat isn’t going to just move traffic to OneWeb and essentially give-up a large portion of its Network Services business. That would be signing its own death certificate. But if Intelsat is part of OneWeb, and benefits from OneWeb’s growth, the equation changes allowing Intelsat to justify aggressively move customers to OneWeb. As a 43% shareholder and critical customer it would have significant influence over OneWeb. We suggest SoftBank might have used this influence to pressure OneWeb into the merger with Intelsat.

If OneWeb succeeds in the market, this may be enough to convince Intelsat creditors refinance debt coming due around the end of the decade. Should this happen, SoftBank will be in position to make an enormous profit from its junior position in Intelsat’s capital structure. Off-loading risk from its capacity purchase agreement with OneWeb is icing on the cake.

Not closed Yet

The proposed merger is contingent on, among other things, current Intelsat bondholders agreeing to an exchange offer. Based on trading prices, bondholders are poised to reject SoftBank’s offer and are expecting SoftBank to sweeten it. It’s not clear that will happen. There were few rumors until the day before the deal was announced, suggesting SoftBank may have not yet done deep due diligence on Intelsat. We suspect deep analysis of Intelsat’s market position and declining market prices will make the deal look worse rather than better over time. We would not bet on SoftBank raising its offer.