Last time we teased about Eutelsat in late 2020, it was a satellite company with a structural decline in Video which represented over 60% of its total sales. The strategy was to milk the existing assets to return cash to shareholders while waiting for the Mobility and Fixed Broadband increase in revenues to be large enough to offset the decrease coming from Video. After delaying the date of a return to growth and a change of CEO, Eutelsat has decided to completely flip around its strategy by acquiring OneWeb. From a defensive stock with stable/slowly-declining dividends, to a high-risk growth stock. So far, the market has not appreciated this change, as the following graph suggests. We rather like the bold move though.
This merger implies EPS dilution of over 50%. This stunning figure is due to OneWeb running up red ink and, due to the merger, adding no less than an extra 250m shares to Eutelsat’s 230m shares pre-deal.
The Gen-1 satellite constellation has already been financed, but it will become operational only by next year. For the moment, 428 of the 648 satellites have been deployed. Eutelsat will have to find the funds to launch the Gen-2 satellites. Although they are expected to be cheaper per unit of capacity as the technology matures, the extra technology on board each satellite could eventually lead to a similar price per launch as for the previous generation. Eutelsat now expects its capex to reach €800m per year starting in FY23-24 for seven years, which will have a catastrophic impact on cash.
The direct consequence of the poor cash outlook on the short term is the complete disappearance of dividends. It has been officially communicated that the €0.93 dividend per share distributed this year will be the last for at least two years. Eva Berneke, the new CEO of Eutelsat, has not ruled out the possibility of postponing dividends further depending on the cash situation and the deleveraging (targeting a 3x net debt/EBITDA ratio, starting from an expected 4x). We believe some minority shareholders have sold their shares as the lack of the dividend yield and the inherent risk of this project no longer fit their investment profile.
Eutelsat will be able to combine its GEO satellites with this LEO constellation to propose adaptable services according to the real-time needs of its customers (GEO satellites have high throughput and high latency, while LEO satellites have low throughput and low latency). It is a first in this industry. We believe it will have more added-value than SES’s proposed combination of its MEO and GEO services, as LEO and GEO are more complementary.
In addition, as seen in the Ukraine war, satellites are more than ever a strategic asset. We believe the resulting new entity could become the EU’s new military constellation, as France and the UK will have seats on the Board (for France it would be through BPI and FSI). Thierry Breton, the relevant commissaire has already clearly stated his desire to have a sovereign European satellite constellation, and OneWeb could represent that opportunity. If that were the intention behind the merger, regardless of Starlink’s technological superiority and advance in the number of satellites sent to space, OneWeb would have a market to address: the EU.
For the first time in its recent history, Eutelsat has a tangible plan to return to growth. After all these years in a market in structural decline, it will finally be positioned on growing activities with a 2020-2030 expected CAGR of 14% (shown on the pro domo graph below).
However, as the graph shows, Government is only 25% of the 2030 TAM. If Eutelsat wants to grow by the low-double digit CAGR it has guided, it will have to win bids against Starlink on the other segments open to brutal competition. This is where it gets complicated. Firstly, Elon Musk has a tremendous head start (c. 2,000 more operating satellites) which have better technology and could make the Gen-1 OneWeb constellation obsolete before it is even finished. Secondly, Elon Musk has his own launchers, and is even helping OneWeb to launch its satellites following the cancellation of the launch from the Baikonur Cosmodrome that stranded 428 OneWeb satellites. If OneWeb wins too much market share according to Elon Musk, OneWeb may find that the access to SpaceX launchers faces impediments. Finally, and most importantly, Elon Musk has the deepest pockets in this industry. Nothing will stop Elon from building his constellation, even if breakeven is delayed. This is clearly not the case for Eutelsat, which is already asking a lot (maybe too much) from its shareholders.
Although Eutelsat has managed to generate a steady c.€600m of FCF p.a. in recent years, this will not be sufficient. With a high leverage of 4x Net Debt/EBITDA and a high-risk future return, financing its operations is bound to happen at wider spreads.
Investing in Eutelsat is buying into risk as opposed to buying into certain cash flow up to the OneWeb merger. Nevertheless, this new strategy was the only solution apart from letting the stock erode slowly. LEO constellations could be the start of a whole new market over decades, and as one of the top-3 early comers, Eutelsat could have a role to play. In addition, for investors which believe in the future of LEO constellations, there is no other listed company in which to invest. We believe this could be a fun bet for patient investors who believe that LEO will become a necessity. Eutelsat and OneWeb are unlikely to crash mid-air but are rather likely to dilute existing shareholders. This is priced in for now with a 34% upside potential.