It has been more than two years in the making but at the beginning of March, nascent Australian satellite operator NewSat announced that it had completed its US$611m financing package to fund its first satellite Jabiru-1. NewSat founder and CEO Adrian…
It has been more than two years in the making but at the beginning of March, nascent Australian satellite operator NewSat announced that it had completed its US$611m financing package to fund its first satellite Jabiru-1.
NewSat founder and CEO Adrian Ballintine spoke with SatelliteFinance editor Ed Ansell about fundraising and the company’s ambitious plans for the future.
EA: Given the time it has taken, how relieved are you that the financing is now ostensibly complete?
AB: It has been a very long journey but it is a very complex matter for a company with a US$120m market cap to raise US$600m. So you have to go through extensive due diligence, the type that you would not normally have to undertake because nothing is left to chance. We understand that and we’re up for that challenge. So I’m not surprised it took that long but it really does take a long time.
EA: And will this be the last we will see of NewSat in the capital markets for a while?
AB: We have raised all the money that we’re going to raise. We don’t need to raise any more and that will sufficiently fund the whole project.
EA: What was the reason for reducing the equity component?
AB: On 29 November, we had our AGM and I was thinking at that stage ‘we’ve got US$200m to raise, I think that we can do some thing that would reduce that substantially and it will involve a lot of negotiating.’ So I thought it was in the interest of the shareholders to suspend the stock to give us 8 to 10 weeks to do some tasks that might end up reducing the equity component by US$100m. And that’s what happened.
We managed to negotiate an extra US$20m from the ECAs, US$10m each. We decreased their upfront fees by US$10m. We put in place a Standard Chartered Bank debt service reserve account for US$25m. Standard Chartered are partial guarantors on the Coface loan along with Credit Suisse and Societe Generale.
We then negotiated a US$30m mezzanine portion with one of our existing shareholders, and that is good because it a PIK so it is accumulating but it is a non-cash instrument. Finally, we agreed a US$16m reduction in transaction costs and the debt service reserve account. So the net effect of that was a saving of US$95m
We had been speaking to people for some time about the equity portion and we always knew that we could raise the equity. Had we had to raise the US$200m of equity, we could have done so. We were oversubscribed on the US$105m. So the trading halt was more to give us time to affect a better deal for our shareholders.
EA: What was the split between new and existing investors in the offering?
AB: 60% of the money is from new investors and 40% from existing shareholders, with three of our largest existing shareholders stumping up the majority of that. One of those was Capital, and I was very keen for them to up their stake because of their global reputation.
The other two existing shareholders are very highly regarded Singaporean investors who I can’t disclose.
EA: In terms of their composition, are they mainly institutional investors or are there strategic players in there as well? Were the investors mainly domestic or international?
AB: Of the US$105m, 20% came from Australia, 80% from international investors and that was split between Singapore, Hong Kong, London and New York. The spread is very good and it’s gone to what I would call the cream of Australian institutions, and certainly the cream of London, New York and Singapore-based institutions.
It changes our register from being very retail to now being more than half institutional. And I think that’s going to be the way that NewSat is going to evolve.
EA: Why is there a piece of mezzanine debt in the financing, was this always in the plan and will you seek to refinance it sooner rather than later?
AB: I thought if I could get some subordinated mezz, then it was less burdensome on the amount of money that had to be raised via equity and therefore was less dilutive. It was my intention to be less dilutive and that was part of the plan of dropping US$100m from the equity.
It is a very good note. It is subordinate to the other debt, a non-cash PIK instrument, there’s probably none better, so we probably won’t refinance it.
EA: Was bringing in the Singaporean investor a conscious decision to bolster your Asian relationship?
AB: We were very target-focused in bringing people to the financing. The investor is a very well-regarded CEO and founder of a billion dollar listed entity in Singapore.
We have an office in Singapore and have done business there for many years. It is a high growth country and we want to embrace a wide range of different investors. Having investors from all over the world was important but Singapore I regard as very important.
EA: How receptive were the US and French ECAs to amending the financing and to ultimately increasing their commitments?
AB: They have a lot of rules and do a lot of due diligence, and so over that period they got to know us extremely well. They understood the deal and knew that it would be helpful for the company for them to do a little more.
We were very much helped by our partners, Jean-Yves Le Gall of Arianespace was extremely helpful in terms of making his recommendations, as was the president of Lockheed Martin. It was very much a team effort.
I also think both ECAs really enjoyed doing this deal as it is the first time an ECA has done a satellite deal in Australia. So it’s a first for them as well.
EA: Is the Ex-Im Bank term loan structured to be paid directly to Lockheed as some previous ECA deals have done or will you receive it all and use it accordingly?
AB: The ECAs keep the money and they’ll make payments to Lockheed Martin and to Arianespace. And that’s in a mutually agreed form with all the parties. We have a schedule that enables them to make the payments.
EA: How will the delay of Jabiru-1’s launch from 2014 to 2015 affect your business plans?
AB: It doesn’t really affect our business at all because the money is paid to the suppliers at the same ratio, it’s just that the whole project happens four or five months later. We have a very good business in our teleport operations at the moment. It is cash flowing extremely well and that will continue, so the logic of building the satellite was for economic reasons.
It is a well-founded idea based on necessity and it takes our business from being a 30% margin business, as a reseller of other people’s capacity, to an 80% margin business where we sell our own capacity.
EA: You have mentioned pre-selling 70% of the capacity of NewSat, how much of the satellite’s overall capacity do you plan to sell prior to operation?
AB: We have currently sold 18% of the whole of the life of the satellite and 46% of the first three years of the spacecraft. By the time it launches we will have sold, in our opinion, 70% of the satellite. At that percentage, the satellite over its 15 year life will generate about US$3.5bn at an 80% margin. So roughly US$170m EBITDA every year.
If we are able to sell what our rivals in the same geographies are selling, that is around 90%, it would take our revenues up over US$4bn and take annual EBITDA to over US$200m.
In the early days we were selling at a 30% discount to market to get sales but we will be selling at rack rate going forward. There are also pieces of our satellite, such as the steerable beams, that will generate a very big margin.
EA: Was the kind of margin generated by satellite operators used as a way of persuading both the new and existing investors?
AB: This is a very high margin business, US$4bn on one satellite is a lot of revenue and US$200m a year is a lot of EBITDA. I think all of our shareholders have waited to see whether we can achieve this.
The second, third and fourth satellites will be now be a lot easier to fund. For one, the next satellites will be smaller and there is no doubt that we have learned a lot from this exercise.
EA: When the Australian government decided not to include NewSat in its universal broadband plans, how much did this affect your long term business model? Were you forced to change tack?
AB: We are not and never will be a consumer broadband provider, that is not our mandate. We’re going to provide big chunks of bandwidth to resellers who will do with it as they see fit. And we will provide teleport services around that bandwidth. Predominantly, our skills our selling into the oil, gas, mining and military sectors.
So the government’s decision to put vast inexpensive tax-payer funded broadband into Australia does nothing to our business model whatsoever. It’s just not part of our plan.
EA: You have since announced plans for a multi-satellite constellation, how are these plans coming along? What is the timeframe for the Jabiru-3,-4 and -5 satellites?
AB: We already have a business plan for -3,-4 and -5. Jabiru-3 is going to be two degrees away from Jabiru-1, Jabiru-4 is over Africa and Jabiru-5 is over South America. And we have orbital slots for that purpose.
We already have a pipeline on Jabiru-3 of about US$200m. It’s our intention to do -3 and -4 together and we expect this plan to be substantially developed during this calendar year. We’ve already had informal discussions with people and we’ve a very good understanding of who will be out customers on them. I think by the end of this year we may have already entered into agreements over the construction and launch of those satellites. And -5 will be sometime in the first half of next year.
EA: Will these satellites be owned solely by you or be a hosted payload like the Jabiru-2?
AB: They’ll be our own satellites in our own orbital locations. The hosted payload was when we didn’t have our own orbital slots. As you know, Jabiru-1 is in a slot we are leasing from Measat, Jabiru-2 is going in the same orbital slot. It is an anomaly because we simply didn’t have orbital slots when we entered in to that agreement.
EA: Regarding the orbital slots, you have an agreement with Kypros Satellites for access to 8 orbital slots, how do you plan to utilise these in the long run?
AB: We now own 8 orbital slots in perpetuity. All of the slots are able to be utilised and the first three that we will use are clearly at locations that we think are the most significant. Those locations are capable of holding multiple satellites and we haven’t got problems with coordination with neighbours in those spots..
There are a couple of slots that are in locations that I doubt we’ll use because they’re in covering territories that are probably not as rich in opportunity as the ones that we have outlined using. So I’d prefer to put two or three satellites into the one orbital slot.
EA: How does the deal with Kypros Satellites work?
AB: We pay a component of cash, equity and then a trailing revenue. So the Cyprus government get a trailing revenue on satellites we launch in those slots. It’s a 1% tail.
EA: You plan to position a satellite over Africa, how do you think you can differ from the many other operators looking to supply this region?
AB: What we have learned by running teleports is that we can provide a lot of value added to our clients. For example, in the oil, gas and mining projects we are the top-of-mind, not because we are the cheapest but we can provide value added services and applications to them.
So when you are talking about Africa and when you are talking about some of the infrastructure projects going on there, we can take the lessons learned in Australia and we can mirror those and that differentiates us.
Whilst we will be able to provide bandwidth just as cheaply as anyone else, it’ll be our value added services which we think will endear us to them. We are very sticky with our existing customers.
EA: The company’s initial business was based on your teleports, will these remain an important revenue stream going forward or will you eventually seek to sell them once you have become a fully fledged satellite operator?
AB: I feel strongly that the teleport business, whilst it will be small, is very important. A small company getting close to large governments has to have a lever and our lever is our teleports. It gives us a lot of kudos with customers and it’s an entry into doing more with other companies.
So you won’t see us disposing of our teleports just to be a satellite operator. I actually think to the contrary, I think we will probably acquire another couple of teleports.
