Author Topic: I - Intelsat  (Read 7034 times)

cameronfen

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I - Intelsat
« on: January 26, 2019, 08:06:13 PM »
This has been mentioned in the General Discussions as one of Kerrisdale's largest positions.  They have a thesis written on Seeking Alpha here: https://outline.com/NkdYVn and here: https://outline.com/YC2EzC .  The basic idea is that Intelsat owns a lot of spectrum from their satellite operations that can be repurposed and sold.  The deal requires FCC approval, but it seems like Intelsat will be able to sell it's spectrum although price ceilings and other regulations may be on the table still.   The satellite consortium, CBA, which includes Intelsat, has proposed to sell 200Mhz of spectrum.  At $ 0.50 per Mhz-pop and 300 million people in the US (these are reasonable, but probably not conservative, assumptions AFAIK), this comes out to $30 billion for the spectrum.  Intelsat owns about 45% of the spectrum, which means they would get roughly $14 billion.  The company has 14 billion in debt and an EV of 16.5 billion.  The company could probably sell another 100Mhz of spectrum for an additional amount to itself of 7 billion, but that has not been proposed or approved by the FCC.  Kerrisdale is more aggressive (although I admit I do not know for sure as I'm not one with satellite spectrum expertise) and says Intelsat can keep 100Mhz and sell 400Mhz.  Even with the 200Mhz proposed, this would double the market cap at a 5x EV/EBITDA (EBITDA = 1.2+ billion) multiple.  If they keep a reasonable 3 turns of debt, the market will likely award a higher multiple and even higher multiples after a return of capital.  Obviously, the company has high amounts of leverage, but after preliminary approval by the FCC for a sale of 100Mhz, the debt market allowed Intelsat to refinance at favorable levels and the company's debt trades at par now.  So even though leverage should be an issue for a company this levered, I can take comfort in the more sophisticated investors pricing this as if it is a stable business. 


alpha

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Re: I - Intelsat
« Reply #1 on: January 26, 2019, 08:23:20 PM »
The Economist recently published an article about all of the new low earth orbit entrants coming into the satellite market(they may be the purchasers of the spectrum for sale). If one of them succeeds getting a full constellation launched it sounds like it has the potential to shake up the incumbents who are using expensive geostationary satellites. Does Intelsat have plans to install a low earth orbit constellation to compete?

cameronfen

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Re: I - Intelsat
« Reply #2 on: January 27, 2019, 08:01:09 AM »
Again not an expert and haven't read the economist article but the main difference between the geo and low earth orbit (leo) satlites is the leo is much more low latency, but requires many more satalites (as these satalites cant just sit in one region in space but move across the earth).  As launch of a satalite is a high percentage of costs, this makes leo sats more expensive.  However with companies like spaceX, space launches are rapidly becoming cheaper as everything becomes reusable.   This is probably the reason they got in this area to begin with. 

That being said because of the relative advantages and disadvantages (aside from the fact that Leo is still relatively unproven), is that leo targets higher value stuff (broadband) while geo targets lower price point stuff with less latency requirements like tv or voice communications. 

Intelsat also is working on building it's own leo satalites and is working with oneWeb.  Additionally the spectrum is valuable regardless of Intelsats underlying business. That being said, I dont think LEO companies will have enough money to buy the blocks of spectrum the CBA is selling, although the c band has its advantages for leo satalites the cost the comes with competing with telecoms as well as antenna cost is a problem.

Packer16

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Re: I - Intelsat
« Reply #3 on: January 27, 2019, 09:49:30 AM »
Having worked in the satellite industry (but awhile ago), I do not think LEOs are a threat due to the orbital mechanics of LEO vs. GEO.  Numerous LEO satellite companies have been started & launched satellite constellations & all have failed to generate supportable cash flows up to this point.  Cost is one problem.  The other is the competitors of terrestrial wireless and the GEOs have low incremental costs once the network is up so the LEOs have to absorb a large fixed cost & higher maintenance costs as the satellites are shorter lived & much more complex in terms of operations. 

I think the larger risk here is a lower realization for the spectrum in terms of payments.  One example is if the White House goes Democratic in 2020 then the US may require a bigger cut of the expected gain than is now expected.  Also, the wireless companies may not pay up as high as expected.  This is always a risk in "spectrum" plays.

Packer

Munger_Disciple

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Re: I - Intelsat
« Reply #4 on: January 27, 2019, 10:40:39 AM »
Kerrisdale mostly exited its Intelsat position during Q3 2018 after pumping it up. There were also large sales by the PE guys in Q4 2018. This doesn't smell good.

cameronfen

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Re: I - Intelsat
« Reply #5 on: January 27, 2019, 12:03:14 PM »
Hmm I wasnt aware of Kerrisdale selling. That's a bit concerning although prices are 40% lower (or 60% upside) from where they sold and about the price they started pumping it. 

I think Packer is right on the spectrum. In my opinion .50 is low for the spectrum, but it's not worth much (much lower if anything) to the areas with 30% of people that are in rural or semi rural US.  So obviously the operating business has to be "good enough".   I will research this more and report back if people are interested.

Munger_Disciple

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Re: I - Intelsat
« Reply #6 on: January 27, 2019, 01:07:27 PM »
It is also not clear to me why Intelsat would get 100% of the spectrum proceeds (for the 45% C-band orbital slots they own). In the recently concluded incentive spectrum auction, the sellers (broadcast TV companies) got around 50% of the proceeds if I recall correctly.

FYI the PE guys sold it at $25.75:
http://www.intelsat.com/news/press-release/intelsat-announces-pricing-of-secondary-offering/
« Last Edit: January 27, 2019, 01:15:41 PM by Munger_Disciple »

cameronfen

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Re: I - Intelsat
« Reply #7 on: January 27, 2019, 01:25:06 PM »
Two things I glassed over originally. 1. taxes on the sale.  Intelsat has 6 billion in tax loss carryforwards so 6 billion should be tax free. Applying a 20% tax to the remaining results in 12 billion to I.  2. However by paying back the loans, Intelsat can save 1 billion in interest expense which capitalized adds some 10 billion to the value of the business.  I think they are doing the smart thing currently by issuing convertible debt or even equity to pay back the bonds as the cost of debt on the balance sheet is higher than the cost of equity at this point.

Business seems to be not great.  Revenue declines by 4 to 8% a year, which I was generally aware of, but I think most of it is due to the fact that no one likes satalite tv which is the big driver of satalites (although surprisingly not a vast majority of Intelsats revenue mix (although they bury more satalite tv in enterprise network services)).  Basically as the US especially gets more advanced, people want less to do with low cost/low quality satalite tv/broadband/communications  when more and more options are availible. 

cameronfen

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Re: I - Intelsat
« Reply #8 on: February 06, 2019, 12:08:27 PM »
Kerrisdale is still long and out with another report (https://seekingalpha.com/article/4238379-intelsat-s-time-relaunch) and conference call.    Maybe they are pumping so they can get out of their position but they clearly think current price is too low (and somewhere between 30-35 plus is where they start reducing).

Munger_Disciple

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Re: I - Intelsat
« Reply #9 on: March 05, 2019, 09:48:54 AM »
https://www.broadcastingcable.com/news/padden-steps-down-from-c-band-alliance-post

Preston Padden stepped down from CBA post. Stock down almost 20% today.