Viasat sucks Inmarsat into its orbit with $7.3B offer

Two years ago, the UK's Inmarsat disappeared from public scrutiny, rather like one of its satellites off the launch pad, when it was taken private in a $6.1 billion deal, including debt. Now its private equity owners have agreed a $7.3 billion sale to Viasat, a publicly traded US equivalent whose shares immediately sank a tenth on news of the deal.

Only $850 million of the transaction fee is in cash, it should be noted. For the rest, Viasat is stumping up $3.1 billion in shares and assuming $3.4 billion in net debt. This bumps up Viasat's net debt to about five times its annual earnings, although Viasat reckons it can dial the ratio back to a slightly more respectable four within two years of closing the deal.

Satellite launches are adding to the problem of space junk. 
(Source: Viasat)
Satellite launches are adding to the problem of space junk.
(Source: Viasat)

After a couple of decades spent lost in the communications cosmos, satellites appear to be exciting investors once again – thanks in no small part to Elon Musk and the Starlink project he hopes will somehow pay for the colonization of Mars. Viasat and Inmarsat are about as old time as satellite gets, though. The former was founded when Ronald Reagan sat in the White House and the latter before he was even elected president. Both have outlived his Star Wars program.

The big attraction for Viasat seems to be Inmarsat's L-band service, which the UK operator has been upgrading to support faster connections with lower-cost devices. These are not the devices you would find in the hands of the average British consumer, but terminals used in shipping, aviation and parts of the government sector. Maritime is probably Inmarsat's most important market.

The sky's the limit

Viasat believes these L-band assets would handily complement its own Ka-band technology and footprint. Besides supporting some connectivity services for government bodies, and providing broadband in rural communities, it is a big name in in-flight connectivity – ensuring not even commercial aircraft are a safe refuge from the Internet. The combination of the two companies and their assets will make it easier to serve their various markets with new and more advanced applications, reckons Viasat CEO Mark Dankberg.

Despite its exposure to an aviation sector that has been largely grounded throughout the pandemic, Viasat has continued to grow sales that have risen by about $900 million annually since 2015, to around $2.3 billion in the last fiscal year.

The downside was a wafer-thin net profit of just $17 million because of Viasat's substantial operating costs. The merger will reportedly generate about $190 million in cost savings each year, but this would represent just 9% of Viasat's operating expenses in 2020.

How Inmarsat has recently performed is less clear because of its private status. Its final-ever public disclosure came in late 2019, when it reported an 11.4% drop in third-quarter revenues, to $327.3 million, compared with the year-earlier period. Its net profit for the period fell 84%, to just $36.1 million.

The deal has attracted mainstream press attention in the UK because it would mark the sale of another UK technology business to overseas investors. As reported by the Guardian newspaper, it comes shortly after the sale to China's Nexperia of Newport Wafer Fab, a chipmaker based in Wales, and also follows the proposed takeover of Cambridge-based Arm, a designer of microprocessors, by America's Nvidia (although Arm already has a foreign owner in Japan's SoftBank).

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Inmarsat's involvement in national security means the proposed takeover may have to be signed off under the recently introduced National Security and Investment Act, holding up the transaction for Viasat. Dankberg currently hopes to close it during the second half of 2022.

The danger for Viasat, perhaps, is that younger rivals sporting low-Earth orbit (LEO) constellations prove hard to beat in critical sectors. Musk claims technological advantages over his older competitors and is also targeting the market for broadband services in remote areas. His is just one of numerous projects, too.

For VSAT (very-small-aperture terminal) companies like Viasat, the good news is that constellations cannot keep multiplying, according to Mike Crawford, an analyst with B. Riley Securities. "We believe the salient points for VSAT investors include that multiple LEO constellations will go into service, but that there is an absolute cap in quantity of such systems," he writes in a research note. Otherwise, the final frontier will simply become too cluttered.

Update: Opening paragraph has been updated to include debt for the private-equity transaction two years ago.

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— Iain Morris, International Editor, Light Reading

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