We think Intelsat’s secured bonds set up well for a short term, catalyst driven re-rating trade based on a potential merger with SES. The companies were in discussions last year, but could not agree to a deal. Now both companies have their C-band windfalls and are sitting on a sizable amount of cash; they need to make their capital allocation decisions now. We think a merger makes sense for both companies. For Intelsat’s post reorg equity owners, it will allow them to de-risk some portion of their investment (assuming part cash deal) ahead of a massive ramp in competitive intensity for the industry, while also increasing liquidity into SES’s publicly traded equity, which gives them more flexibility for how much they want to play for upside in their investment. For SES, it further diversifies them away from their secularly declining Video business, and gives them more scale and go to market channels into attractive satellite verticals like govt, aero and maritime.

 

Intelsat's 6.5% 2030 secured bond at ~90c / mid to high 8% yield could trade thru its 102 call to approach SES’s comparable yields <4.5% (SES is IG) upon completion of a merger. In the event of a merger announcement, we think a trade up to just below par makes sense (given there would be regulatory concerns and potential political concerns given Intelsat ties to US govt/DoD). We think the event could happen as soon as this summer, which is the rough timing that SES and Intelsat have given for their updates on capital allocation. This is a “single” type investment (an infield single at that), but in this market we are not trying to go for triples or home runs. We like the event driven angle here, the definitive timeline (if no deal announced this summer / alternative plans announced for cash, we are exiting this trade), and the downside protection given most of these satellite revenue streams are contractual with a decent level of visibility, and satellite sector sentiment is so bad that multiples are already at historical lows, so multiple compression less of a risk.

 

We think the opportunity exists because (1) satellite sentiment is so poor right now given competitive backdrop of Starlink and other constellations coming to market soon, and (2) these bonds don’t screen cheap and the total return opportunity is just not that great, so unlikely there is a lot of focus/time spent on the event angle here currently.

 

 

Intelsat filed for bankruptcy in 2020, after a long speculative process about how much they would receive in the C-band spectrum auction (where they had to clear use of the spectrum for their video business, but didn’t technically own the terrestrial rights for the spectrum). Ultimately, they agreed with the FCC on a potential $5b+ payout, with SES in line for a similar sum, as the two have roughly equal share in US video distribution.

 

Fast forward to today, and both companies have received the majority of their C-band sums. Intelsat paid off its term loan in full, leaving it with just a $3b secured bond outstanding against $1.1b cash, pro forma for a $130 dividend paid in January. SES will have paid off EUR 1b of debt, leaving it with EUR 3.5b of gross debt against EUR 2b of cash. (Company will have a couple hundred million of dividend payments coming up, but will be generating FCF to cover).

 

SES has around EUR 1b of ebitda. So 3.5x gross leverage and 1.5x net. Mgmt says they want to be <3x to stay IG.

 

Intelsat has $900m ebitda (subject to several adjustments to get to a lower cash ebitda), and if include $800m cap leases, gets you to around 4x gross leverage and 3x net leverage. 

 

 

Intelsat’s $2b top line business is roughly an even split 4 ways between Network Services, Mobility, Media and Gov’t. NS is satellite connectivity to corporate networks (in remote parts of the world) and wireless cell site backhaul. Media is US video distribution to cable head ends and outsourced direct to home satellite distribution to emerging market consumers (think DirecTV but if they leased satellite capacity instead of owning the satellites). Both of these businesses are secularly challenged given terrestrial fiber build out over time (Media more so than NS). Importantly, given that both of these segments are mostly pure wholesale revenue that is on-net, ebitda contribution will skew higher than their 50% revenue share. Mobility and Govt are seen as growth end markets for satellite, as terrestrial solutions cannot compete. It’s important to recognize that Intelsat has valuable distribution for these segments. In mobility, it acquired Gogo’s commercial aviation business, and therefore has a full managed service offering to airlines to offer in flight WiFi instead of just wholesaling to other providers like Panasonic (what SES does). Intelsat is considered number two in this market currently, behind Viasat/Inmarsat. Intelsat has also built out a managed service offering for the maritime segment (commercial and shipping vessels, not as much cruise). Finally, Intelsat has a long history serving the US govt / DoD, and maintains important relationships in this channel.

 

Why is this relevant/important from SES’s perspective? SES has 50% of their revenue tied to legacy video, with only 25% from govt and another 25% split between fixed data and mobility. So only 40% of their top line is sustainably growing. A deal with Intelsat would allow the company to further diversify away from video and get important managed service capabilities and channel exposure in commercial inflight connectivity. Right now, SES does not have managed services for inflight connectivity, only selling wholesale to companies like Panasonic, Anuvu, Thales and Gogo (which is now owned by Intelsat). SES has direct exposure in cruise, but no where else in maritime really. And their recent deal for Leonardo’s DRS segment in govt shows they are trying to beef up their service provider capabilities there and increase exposure to the US Govt. Indeed, this is a consistent theme we have seen with satellite M&A lately - acquiring downmarket service provider capabilities and/or channel distribution. It was part of the rationale for Eutelsat and OneWeb, a large part of the rationale for Viasat and Inmarsat, and explains acquisitions such as Intelsat-Gogo, SES-DRS, Viasat-Rignet, etc. Capacity is being commoditized, so satellite operators can no longer simply rely on the wholesale channel anymore.

 

 

Intelsat post reorg equity is quoted in the $26-28 context, giving it a market cap of roughly $1.8b (68m shares). Adding in $2.6b net debt gets you to $4.4b TEV. Company should generate another couple hundred million of cash flow this year, owing to the last remaining C-band payment coming in, but we just assume that this inflow balances out the couple hundred million cash burn in 2025-26. Intelsat has around $900m adjusted EBITDA, but only $700m cash EBITDA after deducting a $100m ASC 606 adjustment and $100m deferred revenue.

 

SES market cap is around EUR 2.4b (only counting 40% of the Luxembourg govt’s B shares, as they are only entitled to 40% of the dividends of the publicly traded A shares). Along with EUR 1.4b of net debt, gets to a EUR 3.8b TEV. SES should generate a sizable amount of FCF this year (also from remaining C-band inflow) but we just assume that this goes to the couple hundred million dividend payments and share buybacks that the company has in place. SES does around EUR 1b of EBITDA.

 

Given the sizable cash balance at both companies, we think SES can afford to make an evenly split cash and share offer for Intelsat equity, while staying below 3x leverage target (to maintain IG ratings). We pencil in $1.25b cash to Intelsat equity, or roughly $18 per share. Then SES shares worth another $1.25b for the equity component (around 33% of PF company). PF company would have $5.4b of net debt on $1.9b cash EBITDA (assuming $150m of synergies, slightly higher than Viasat and Inmarsat’s $100m target given greater overlap), or just under 3x net leverage (and right at 3x pre synergies). Keeping SES share price constant would imply a $9b TEV or just around 5x pre-synergies EBITDA. You then have upside levers via synergy valuation, multiple uplift (stronger, scaled company with less reliance on declining end markets) and EBITDA growth. For synergies, the $150 at a 5x multiple translates to around $1 per share of SES (or $3.50 per Intelsat share). 1x turn of multiple uplift is $2b of value, or roughly $3 per SES share / $9 per Intelsat share. Finally, 10% EBITDA growth at a 5x multiple is around $1b value or $1.40 per SES share / $4.50 per Intelsat share. So for Intelsat, can get to >$50 per share, which we believe is close to the equity's basis in the Jackson unsecureds (what equitized in the BK). And for SES, can get to >€10 per share. So both equity bases could see a double from here. We think this transaction works for both sides.

 

 

We view the bonds as an attractive, low risk way to play this event. But given the math we outlined above, there is definitely a case to be made for the equity. Part of the return will be longer term though - relying on the deal closing, multiple uplift, synergy realization, etc. We are cautious overall on the satellite space given the amount of competition coming online, so would prefer to play this out via a shorter dated trade.

 

On downside, we think it would really be two things. One would be an earnings miss or industry data point / commentary resulting in multiple compression. But a lot of these satellite revenue streams are contractual and have decently high visibility, so with guidance for the year out of the way, we think you are derisked there and only have exposure for 2 quarters maximum. On multiple compression, the entire space already trades so poorly and sentiment is so negative, we are not sure how much lower it can go.

 

The other downside risk is that Intelsat dividends out cash to the equity or plows into share buybacks. We think that is definitely a possibility, but seems that mgmt and the equity owners are balanced here…they know they need to further invest in the business to get their own multiple rerating, if they are going at this standalone. They have discussed funding a mid earth orbit constellation, for example (interestingly, only SES has a MEO currently, so we do wonder if part of this is a negotiating tactic). In the case of a no deal scenario, we think mgmt and equity owners will opt for a balanced capital allocation approach, part of which will be reinvesting in the business and therefore not completely detrimental to the bonds.