Wells Fargo Analyst Thinks Intelsat Could Make a Move for Telesat
[Via Satellite 2-10-2014] Intelsat could make a move for Telesat, according to Wells Fargo — and at a stroke, the “Big Four” would become a “Big Three.” In a research note, titled “Telesat Overview – Potential Satellite M&A target,” Wells Fargo Senior Analyst Andrew Spinola believes it is more than possible that Intelsat could pursue this acquisition.
“We think the likelihood of a transaction between Intelsat and Telesat is meaningful,” Spinola said. “The owners of Telesat appear to want to sell, and we believe that Intelsat would be interested at an attractive price. Intelsat is focused on delivering its balance sheet with cash from operations, but because Telesat is a unique asset and the only potential acquisition of any size, we think Intelsat would be willing to pursue an acquisition despite the extra half turn of leverage it would add. It seems to us that the probability of a deal is meaningful and that price is likely the main obstacle.”
Wells Fargo put out the report after a Reuters article in late January talked about the possibility of a Telesat sale with the report claiming Loral is now working with Credit Suisse, which is why Spinola believes a potential deal could be “in the works.”
Spinola believes that SES and Intelsat are the only two companies with the resources and potential synergies to acquire Telesat. He thinks a deal could benefit both sides. “We think Telesat would trade in the public markets between 7.0–8.0x ’14E EBITDA if the owners pursued an IPO, although an IPO is unlikely given tax implications to Loral, but given low interest rates and meaningful potential synergies with Intelsat or SES, we believe that a transaction could benefit the buyer and seller even at 8.5-9.5x ’14E EBITDA,” Spinola added.
When looking at a potential valuation, Spinola believes the deal could cost Intelsat anywhere between $4.7 billion and $7 billion at the high end. “We believe Intelsat is the most likely acquirer [of Telesat] in our coverage universe. Intelsat and Telesat have meaningful overlap, so we assume no revenue synergies from this transaction but potential cost synergies. We would note that there are substantial potential cost synergies that Intelsat could realize, but we understand that Canadian laws restrict the exporting of technology jobs so there are restrictions on the synergies that could be realized,” he said.
However, rumors have swirled around Telesat over the last couple of years. The satellite operator is the fourth ranked FSS operator and operates 13 satellites across its fleet. However, one issue that could make a deal difficult for Intelsat is the cost of financing.
“Intelsat would be taking on roughly an additional $6 billion of debt for an incremental $100 million of free cash flow by our estimate,” said Spinola. “The long-term nature of the cash flows in this transaction creates meaningful long-term interest rate risk for Intelsat that needs to be considered. We use a blended cost of debt assumption of 6.5 percent in our analysis that is likely conservative given that Intelsat would likely utilize term loans to fund part of the acquisition. But if Intelsat’s blended cost of debt on the transaction were to rise to 8.5 percent over time, the free cash flow accretion of $100 million would become dilution due to the additional $120 million of interest expense.”
Telesat’s business is mainly focused on North America, where it derives the majority of its revenues, and is a private company with two shareholders, Loral and PSP Investments. Spinola says that a sale “is a likely outcome” given the withdrawal of PSP’s request to start an IPO.