France-based satellite operator Eutelsat's merger with UK rival OneWeb, announced on 26 July, is just the latest in a major uptick in sector consolidation.
The transaction, which values OneWeb at USD 3.4bn, will combine OneWeb’s constellation of 648 low-earth-orbit satellites with Eutelsat’s fleet of 36 geostationary satellites. The hope is it will help them compete with the Starlink constellation of Elon Musk’s SpaceX.
The deal comes just months after Carlsbad, California-based Viasat [NASDAQ:VSAT] agreed to pay USD 7.3bn last November for UK-based Inmarsat, whose 14 satellites provide global mobile communications for ships, planes and other remote areas.
“We’ve seen more M&A activity in the last couple of years than before,” says one satellite company executive. “We believe it will continue.”
In 2021, buyers signed 32 deals worth a combined USD 16.9bn for North America-based targets, the highest level since 2007, according to Dealogic data. Outbound deals that involved North American buyers landing overseas assets added a record four transactions worth USD 8bn, buoyed by Viasat’s Inmarsat deal.
Much of 2021’s activity in North America – five deals totaling USD 13bn – involved space startups, such as Planet Labs [NYSE:PL], Rocket Labs [NASDAQ:RKLB] and Virgin Orbit [NASDAQ:VORB], merging with special purpose acquisition companies (SPACs).
While SPAC deals have since crashed to earth, another major trend is currently driving M&A activity: vertical integration. Companies that own and operate satellites want to offer services directly to their customers too, notes the executive. While newer satellites can offer huge capacity, prices for that bandwidth are dropping. It means satellite operators need to get closer to their end-customer to improve margins.
Viasat talks about the importance of its vertical integration strategy and its purchase of Inmarsat is one example of that at play. Another is McLean, Virginia-based Intelsat's acquisition of inflight internet provider GoGo Commercial Aviation for USD 400m in 2020.
Another direction satellite companies are taking is to go deeper in the defense sector, a big and steadily growing market with high margins, where satellite communications are vital for unmanned aerial vehicles (UAVs), warships and tactical equipment, says the executive.
As satellite companies win major defense contracts, they become attractive acquisition targets for larger defense contractors who don’t want to miss out, say two bankers. That is driving the interest in at least two such companies exploring a sale: Denver-based satellite company York Space Systems and Arlington, Virginia-based defense engineering company BlueHalo.
Mergermarket reported in June that York Space was exploring a sale, after the Space Development Agency awarded it a USD 382m contract to deliver satellites that provide military data and connectivity worldwide to various warfighter platforms.
Arlington Capital-backed BlueHalo also is exploring a sale and is getting interest from defense companies, Mergermarket reported on 2 August, months after it won a USD 1.4bn US Space Force contract to enable the modernization of satellite operations.
The Oneweb playbook
Several satellite companies, bedeviled by debt, entered bankruptcy proceedings in 2020. Oneweb was in that group, along with Intelsat, Speedcast and Global Eagle. All have since emerged with a clean slate. The new creditor-turned-owners won’t want to stay there for long. Oneweb’s agreement to sell to Eutelsat was the first domino to fall. How long before the others follow?
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