Search for connectivity solutions points to satellite ground segment consolidation

The satellite ground segment is continuing to see consolidation as it increasingly focuses on connectivity solutions against a backdrop of middling growth in a sector experiencing intense transformation. The explosion in consumer broadband is expected stimulate growth in the…

The satellite ground segment is continuing to see consolidation as it increasingly focuses on connectivity solutions against a backdrop of middling growth in a sector experiencing intense transformation.

In the latest deal for the segment, US network infrastructure provider CommScope (NASDAQ:COMM) is acquiring network equipment specialist Arris International (NASDAQ:ARRS), also based in the US, in a cash transaction worth US$7.4bn, including the repayment of debt. An Arris spokesperson said the deal is expected to close in early 2019.

Private equity firm The Carlyle Group has taken an ownership position in CommScope through a US$1bn minority equity investment as part of its financing of the transaction.

The deal is part of a larger trend of M&A. In August Swiss digital security and convergent media solutions specialist Kudelski Group (SWX:KUD) sold its conditional access module and set-top box businesses to SmarDTV , an entity formed by France technology company Neotion . Arris itself had made multiple deals, most recently buying Ruckus Wireless and ICX Switch businesses from Broadcom (NASDAQ:AVGO) to grow its portfolio in converged wired and wireless networking technologies.

Connectivity solutions sought

The search for connectivity solutions is increasing, as pressure from new applications rises in the satellite ground segment.

The rationale behind the CommScope-Arris deal says as much. The combined company is expected to drive profitable growth in new markets, shape the future of wired and wireless communications and position the new company to benefit from industry trends, including network convergence, fibre and mobility everywhere, 5G, IoT and rapidly changing network and technology architectures.

Indeed, Arris has offerings in broadband, video and wireless, and the company combines hardware, software and services to enable video experiences and connectivity across a variety of environments.

The explosion in consumer broadband is expected stimulate growth in the satellite ground segment. Markets such as aeronautical satellite communications and cellular backhaul are becoming fast-growing opportunities.

Non-GEO terminals are expected to gain traction with the arrival of LEO constellations. Non-GEO HTS providers will possess the largest share of wireless backhaul market, as plans are implemented for constellations in LEO and MEO. This sector will come close to exceeding the entire FSS market for backhaul by 2027, Northern Sky Research has said.

Last autumn, the London School of Economics predicted that the inflight connectivity market will be worth US$130bn by 2035 and contribute US$30bn to airline revenue. It currently contributes US$900m to airlines.

And, VSAT platforms are more strategic than ever as the focus shifts from satellites to networks. VSAT installations grew 18.8% in 2017 compared with the previous year, to 23,000 terminals, Euroconsult has said. Though there are far more MSS terminals, they decreased 0.4% in 2017 compared with 2016, reaching 314,300 strong.

“Terminals are to [satellite communications] what picks and shovels were to the gold rush,” NSR senior analyst Lluc Palerm said in its November report on the ground segment.

Smallsat Earth observation (EO) constellations are also building up demand for the EO ground segment. In a December 2018 report by Market Research Future, the global EO satellite market is estimated to have grown at 9% compound annual growth rate from 2017 to 2023. Torrid investor interest in smallsat launch confirms the market’s interest in the sector.

EO operator Spire has one of the largest ground station networks with more than 30 locations, CEO Peter Platzer told SatelliteFinance in an interview.

“However, we welcome the entrance of further options, especially Amazon (NASDAQ:AMZN), allowing us to augment our network with additional capabilities, especially during periods of high demand,” he added.

Broadcast in transition

Despite these trends, satellite TV still drives the most revenues in the satellite ground segment, with set-top boxes and antennas capturing the largest share of revenues, as the trend to hybrid networks and potentially broadband-only increases.

Set-top boxes and antennas account for 79% of the revenues by equipment type. Certain markets where Arris is strong – South Africa and Australia and parts of India – are expected to see continued focus on satellite as the main delivery mechanism for pay-TV, the Arris spokesperson said.

Indeed, the NSR report shows that antenna shipments will continue to grow from 2019 to 2024, when it will start to level out, 120,000 and 132,500 units, respectively. Growth is expected to be solid in Asia, where the terrestrial infrastructure is limited, and somewhat less dramatically in Europe.

Mirroring this, ground equipment shipments will have experienced ordinary growth between 2017 and 2024, 135,000 and 150,000, respectively, under NSR’s base scenario. The ground sector will have grown from a bit more than US$12bn in dollar volume in 2017 to about US$16bn by 2027, meaning only 2.5% compound annual growth.

At the same time, growth will be challenging given saturation and pressure from alternatives like multichannel TV in developed markets and a highly contested ecosystem in developing markets.

The pay-TV sector is in flux, according to report by market analyst The Diffusion Group. Legacy pay-TV penetration will fall from 81% of US households in 2017 to 60% in 2030, it suggests. At the same time, OTT TV services provided by platforms such as Dish Network’s Sling TV and AT&T ’s (NYSE:T) DirecTV are set to grow from roughly 4% of US households to 14%, up 350%.

In January UK satellite broadcaster and fibre player Sky (LON:SKY) said it plans to make all its channels and content available online, giving customers the option of doing away with a satellite dish. The pay-TV company offers some programming online on its Sky Go and Now TV services and through Sky boxes.

Operators that either have a mixed network or have access to robust broadband networks are accelerating the move to “all IP” broadband or OTT delivery of video content, the Arris spokesperson said.

“This doesn’t necessarily mean a reduction in STB sales for Arris, but a shift from satellite or hybrid satellite to [broadband] or OTT boxes,” the person said.

Allen & Company, Deutsche Bank, JP Morgan and BofA Merrill Lynch are serving as financial advisers to CommScope, and Alston & Bird, Latham & Watkins, Cravath, Swaine & Moore, Pinsent Masons and Skadden, Arps, Slate, Meagher & Flom are serving as its legal counsel. Evercore is serving as financial adviser to Arris. T routman Sanders, Herbert Smith Freehills and Hogan Lovells are serving as its legal counsel to Arris. Simpson, Thacher & Bartlett is serving as Carlyle’s legal counsel.

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