While the solid growth in the satellite sector could lead one to believe the market is consistent and steady, there are actually profound changes afoot driven by technological, commercial, financial and regulatory factors. As a result, stakeholders will…
While the solid growth in the satellite sector could lead one to believe the market is consistent and steady, there are actually profound changes afoot driven by technological, commercial, financial and regulatory factors.
As a result, stakeholders will have to contend with a number of strategic issues that will likely change the structure of the sector over the next few years. This review provides a focus on a few of those, which will be discussed in extensive detail during the World Satellite Business Week in Paris in September.
Time for M&A transactions
The relative improvement in the economy and in financial markets in 2010 may open a new window for M&A transactions in the satellite sector. Many satellite companies are in good shape and may be either good acquisition targets or strong buyers. At the same time, private equity firms are appearing to show a renewed appetite for acquisitions, and could play a role in upcoming transactions.
The first half of the year was marked by the acquisition of CapRock by Harris Corp. in April, and Echostar’s attempt to acquire Satmex in partnership with MVS Comunicaciones.
More recently, Schlumberger announced the sale of its Global Connectivity Services. More deals in the fragmented VSAT service sector would not be surprising.
At the level of satellite operators, Canada may be the next focal point. Following the elimination of foreign ownership restrictions, Telesat may represent an acquisition target if any of its shareholders consider exiting the company. Ciel Satellite Group, 70% owned by SES, may also be impacted by this change in restrictions.
From mid-2008 to mid-2009, there was a real lull in M&A transactions. Over the last two years, project financing and acquisition of in-orbit satellites (including distressed assets such as Protostar’s satellites) have dominated. Viasat’s completion of the acquisition of WildBlue in late 2009 may have marked a change in that and the next six months may bring a more balanced mix of organic and external growth, and perhaps as many as three to five large transactions could take place before the end of the year.
Wholesale operators to revisit Kaband market entry strategies Satellite operators need to clarify their Ka-band strategies.
Vertically-integrated operators have largely pioneered the market, with satellites in orbit and under procurement primarily targeting the US and Canadian markets so far. These have been followed by the O3b constellation project. In parallel to those dedicated systems, an increasing number of established operators have begun to invest in Ka-band payloads.
While Eutelsat is the only established wholesale FSS operator to have invested in a dedicated satellite in the last five years, Telesat is already a large Ka-band provider primarily through Anik-F2 and Telstar-14 (Estrela do Sul). An increasing number of regional operators including Arabsat, Nilesat, Spacecom, RSCC, Skyperfect JSAT, Koreasat, Measat, Insat, Turksat, Hispasat, Nigcomsat and soon Yahsat and Venesat are now planning to have Ka-band transponders on satellites (also offering C and Ku-band), thus creating an almost worldwide Ka-band coverage long asked by concerned customers. In total, over 60 satellites in orbit (including DirecTV and Echostar) should carry Ka-band transponders by 2013, compared to 23 in 2009, which will represent almost a quarter of the operational commercial GEO satcom fleet worldwide. The most recent striking news, Inmarsat’s announcement of the procurement of three Ka-band satellites and its resulting future entry in the ‘FSS’ market, should also push other operators to react.
For operators that have remained out of Ka-band investments so far, next satellite orders should raise the issue of investing in the frequency to maintain their competitive positioning against other operators. Intelsat has filed for a Ka-band satellite in the US late last year with no firm investment decision announced so far. For SES, whose main Ka-band initiative has been the investment in O3b so far, it will be interesting to follow their next procurement decisions. Meanwhile, Eutelsat confirmed that a Ka-band payload will likely be on the satellite acquired through the partnership with ictQatar. The challenge for the industry will be to find the right balance between a supply bubble and underinvestment in the frequency and related coverage schemes. For equipment and service providers, investments should accelerate as operators bring supply to the market. Beyond the consumer market, the professional and government markets should represent an increasing focus for market players.
The case for hosted payloads in reducing capex and increasing revenue
The convergence of government needs and operators’ financial interests has boosted development of hosted payloads in recent years. While governments are eager to limit public expenditures and accelerate the development of certain civil and military programs, the benefits for satellite operators range from accessing orbital resources, to reducing capital expenditure or increasing revenues. For example, Intelsat recently received an upfront payment of $317m from the Australian Defense Forces (ADF) for the provision of a military (UHF) hosted payload onboard the IS-22 satellite. From our estimates with services taken apart, it represents a capex reduction of up to 60% for the project.
Overall, compared to two hosted payloads on geostationary satellites in 2002, eight were in orbit in 2009 and 13 should be in orbit by 2013. The best positioned operators in that market are likely global operators, due the number of satellites procured and to the diversity of orbital positions under management. As such, Intelsat, SES and Eutelsat together carry half of all hosted payloads, which still remains below their global market share so far. In parallel, a number of regional operators carry payloads for their related governments, including KoreaSat, Optus, Star One and Turksat.
In addition to geostationary satellites, the NEXT constellation of Iridium plans to embark up to several dozens of hosted payloads, that could be used for either communications, earth observation or science purposes.
Partnerships with local stakeholders for business expansion
The combination of several factors – an overall tightening of orbital resources, access rights to spectrum at certain orbital positions and sustained demand capacity in a number of areas – are creating the conditions for an increase in the number of transactions. These transactions tend in most cases to involve an established satellite operator and a local stakeholder in emerging regions.
Recent examples of such transactions include the New Dawn project between Intelsat and an investor consortium led by Convergence Partners, the partnership between Eutelsat and ictQatar, the agreement between Measat and an office of the Ministry of Communications and Information of Azerbaijan and the SES WorldSkies agreement with the Andean Community of Nations for the use of the 67 W orbital position.
In addition to the access to spectrum rights, such agreements can result in either capex savings or specific revenue opportunities, as operators’ ‘partners’ are often interested in using part of the payload of involved satellite programs.
Project financing still at the forefront for innovative satellite systems
Satellite technology breakthroughs in recent years have resulted in a number of new companies entering the satellite business. Such companies include O3b, Avanti Communications, Viasat, OverHorizon, Omniglobe, Spectrum Five, Newsat, among others etc…Most of the systems are focused on providing higher capacity satellites exploiting a technology breakthrough (multispotbeam coverage, Ka band usage, reverse-band etc.). In total, such innovative venture projects are likely to represent an investment of more than $4bn.
Most of those programs are believed to be currently involved in the financing processes, though at various stages.
The financing process tends to nearly always involve some sort of government support, including the use of export credit agencies.
Although now an established company, Iridium, with its NEXT constellation program, could almost qualify, with a new design and the planned integration of hosted payloads in its constellation. The company, which announced major contracts in the first half of 2010, benefits from the support of French ECA Coface and is believed to be in the middle of its $1.8bn debt financing process.
All of this aiming at supporting business growth These transactions, partnerships and financing processes reflect the current dynamic nature of the satellite sector. FSS operators reached a new revenue milestone last year – over $10bn – with growing demand for satellite services, ranging from video broadcasting to trunking and network services.
While the introduction of high power Ku-band in the nineties and the takeoff of digital TV in 1995 initiated a growth cycle for the satellite sector, current partnerships and innovations should provide relays of growth for the satellite communication sector.
As for other parts of the ICT sector, making the investment decisions in the right technologies and market segments could significantly impact the shape of the sector in the next five years.
By Pacôme Revillon, CEO, Euroconsult
Euroconsult sources:
17th Satellite Communications & Broadcasting Markets Survey, Forecasts to 2019
13th Satellites to be Built & Launched by 2019, World Market Survey
And other in-house research
