Can Europe’s newest space star beat SpaceX’s Starlink?

Once a client of Elon Musk and his rocket company SpaceX, Europe Eutelsat (EUTLF 3.29%) is about to become… a competitor.

In the summer of 2016, Eutelsat got at least a footnote in the history books when one of its satellites became the payload for an early SpaceX mission aimed at demonstrating rocket reusability. (The launch was successful…the landing, not so much.) But now Eutelsat wants to become a full-fledged player, not in launching satellites, of course, but in operating them.

Hard SpaceX Starlink

With nearly 3,000 broadband internet satellites launched in the past three years, SpaceX Starlink is currently the largest satellite communications constellation in orbit – and the largest satellite constellation, period. No one else comes close.

But Eutelsat wants to try.

Last week, the French satellite communications company announced an all-stock deal to acquire rival satcom operator OneWeb. In exchange for their existing shares, owners of OneWeb shares will receive 230 million newly issued Eutelsat shares. According to data from S&P Global Market Intelligence, this will precisely double Eutelsat’s share count to 460 million shares, which will translate to a market capitalization of $3.5 billion for the combined company.

After the merger, Eutelsat will own 100% of OneWeb. However, the UK government will hold a “special share” that gives it veto power over certain transactions with national security implications and favors the use of UK companies to manufacture and launch the company’s satellites. The UK government will hold an 11% stake in Eutelsat itself, and India’s Bharti Global Ltd. will hold 19%.

Once completed in the first half of the fiscal year (H1 2023), the transaction will add OneWeb’s constellation of 428 Low Earth Orbit (LEO) internet satellites to Eutelsat’s existing fleet of 36 larger GEO communications satellites. and in higher orbit. As Eutelsat explained, the transaction will thus create the only “integrated GEO and LEO player” in the world. The two constellations will become complementary, combining the fast response time (i.e. low latency) of OneWeb’s LEO satellites with the larger geographic coverage area and bandwidth of Eutelsat’s GEO satellites. .

The Opportunity

Eutelsat expects the B2B and B2C satellite internet markets to grow “three and five times respectively over the next decade”, reaching $16 billion (in total) in global annual sales by 2030. C It’s a curious number, because according to SpaceX’s internal projections, this satellite internet market will be worth more than $30 billion to SpaceX Starlink alone by 2025!

It remains to be seen which of these two figures ultimately turns out to be correct. In the meantime, Eutelsat already sees good financial reasons for acquiring OneWeb.

Consider that in the fiscal year ending June 2022, Eutelsat recorded annual sales of $1.2 billion and net profit of $241 million. Eutelsat does not see turnover changing much immediately after the merger. The combined company’s projected revenue will remain near the $1.2 billion mark. But he expects revenues to grow in the “double-digit” range “over the next decade”.

On the earnings side, Eutelsat believes the combination of the two businesses will generate $150 million in annual “revenue synergies” after four years, $80 million in “cost synergies” after five years and “optimization of investments”. an additional $80 million in the first year. post-merger, potentially increasing profits by a combined $310 million, more than double Eutelsat’s profitability.

This assumes that the projections turn out to be correct, of course. In the meantime, for the first few years following the combination, Eutelsat intends to suspend the payment of its generous dividend yield of 12.4%, a decision which is unlikely to make this combination popular with its shareholders.

A risky bet

This fact alone is indicative of the financial pressure that Eutelsat could face as it absorbs OneWeb and takes on the responsibility of continuing to grow its new subsidiary’s LEO satellite fleet. It also doesn’t help that Eutelsat is rushing to catch up with satellite internet leader SpaceX and also trying to maintain a lead over (AMZN -1.24%)which announced its intention to build its own Internet satellite constellation, Kuiper project.

Admittedly, Eutelsat probably thought it necessary to Something to inflate its revenue growth rate – which is expected to average just 1% per year over the next five years. Admittedly, buying a full startup like OneWeb also has the potential go around. But Eutelsat really seems to be “betting the company” on this deal, and I’m not at all convinced that it’s a safe bet.

Indeed, it seems that it has already cost Eutelsat shareholders their dividend. We can only hope it doesn’t cost them their shirts either.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Rich Smith has no position in any of the stocks mentioned. The Motley Fool holds positions and recommends Amazon. The Motley Fool has a disclosure policy.

Mary I. Bruner