[Satellite News 09-15-10] The next few weeks are likely to be highly significant for O3b Networks as it looks to close the financing deals vital for its overall future and become fully funded. The company, which has SES, as one of its shareholders, is now at it stage where it needs to get its financing issues sorted out, so that it can move to the next stage of its business plan. Mark Rigolle, CEO, O3b Networks talks with Satellite News about where O3b is in terms of funding.

Rigolle: I think the key thing we need to do which will enable us to continue to tackle issues on satellites, ground segment and launch vehicles is to get fully funded. That looks like it is going to be coming together in the next few months. The interesting thing about our funding is that there are four tranches, which makes it a complicated exercise which takes a lot of effort. The fact is we are raising equity, issuing mezzanine debt and senior debt. A chunk of the debt is backed by Coface, the French export credit agency.  There are four different tranches, which means four different sets of investors, each with different interests. We have got to try and coral all of that which makes it a very stimulating exercise. We are almost there.

Rigolle: We aim to have it done in the next two months.

 

Rigolle: It is fair to say that when I joined in February, I would have wanted us to close this before the summer. Now, it is going to be after the summer. So, there is some slippage. I think it was due to co-ordination of the various tranches and making sure you have something that works for everyone.

Rigolle: That is the second aspect which makes us different from other people. We are a project. We are still several years pre-revenue. It is probably easier if you have cashflow, even if there is only a trickle of cashflow compared to what you are trying to raise. We have got nothing right now. That is a key difference. I can’t really blame the financial crisis or the banks problems for the time it is taking to get to where we are now. It just takes a lot of hard work. Apart from banks, we are also talking to development finance institutions. It takes time to get all these people comfortable and get through their internal processes. There is technical due diligence, legal due diligence etc.

 

Rigolle: We are looking for $900 million in total financing. More than half of that ($500 million) is Coface backed, and the rest is equity, mezzanine and senior debt. Once that is in place, we will be in a much more solid place to map out our roadmap. You shouldn’t think we have only been talking to investors. At the same time, we have signed our ViaSat contract, for the development of gateway terminal equipment, a key component of our network. That needed to be done. We also have launch contracts and satellite manufacturing contracts in place. But, right now, we only have $175 million in equity, and we need to add $900 million in capital, and that is a big hurdle to get over.

 

Rigolle: We need to get all the funding sorted before Christmas. If we don’t meet that deadline, it becomes more difficult and we have to start re-negotiating contracts. We would have to start again. But, I am 99.99 percent certain we will have the financing in place. We are very close.

 

Rigolle: Not really. It might help if it creates more attention on the ground equipment manufacturing side. If there is more of an eco-system of companies producing equipment, this could benefit our customers, and that is ultimately good for us. There are different types of terminals than the ones that ViaSat is building for us that need to be produced. So, that is a whole new area where we need to incentivize companies like ViaSat, HNS, Gilat and Newtec to go and produce. The more hype and discussion around Ka-band in general, the better.

Rigolle: The only possible impact I see is the one of possible frequency interference. This is a technical issue we deal with by using only frequencies which are exclusively ours in certain regions of the world, close to the equator. In any case, it is not visible to the customer and does not impact how we grow our business. Inmarsat going into Ka-band does not pose a competitive threat to us. It may even represent a positive development, as it creates more attention around Ka-band, so that will lead to more R & D on the ground equipment side.

 

Rigolle: Our engineering team will be working with Thales Alenia Space to make sure we stick to our milestones. The ground team will be working with ViaSat on the tier one terminals. At the same time, the product development team will be defining the ground specifications, so we can have attractive products and services. We don’t want just to do trunking. We want to do cellular backhaul. We can enable high-performance networks for companies with particular needs, such as oil rigs off the coast of Nigeria or the Gulf of Mexico. There are many different types of bandwidth requirements.   
    So, we want to have more tailored product offerings. On the FSS panel (at World Satellite Business Week), someone erroneously described O3b as a ‘one trick pony’. That is something we definitely are not and do not want to be. Any satellite operator sells connectivity, so in a sense we are all one trick ponies. What you need to be able to do is support applications with that connectivity. The technical challenge is to deliver the service, the product development challenge is to come up with products and services that will sell, creating a need for the capacity you provide from space, Our sales strategy is already beginning to change. It is not just about selling as much as possible. The question is how can we optimize things, enhancing the yield on the limited capacity we have to offer.   
    After all, we’ll have a limited number of beams on the first eight satellites. So, we are focusing on targeted accounts in Latin America, the Middle East etc. These companies typically have very long procurement cycles. As an example, there is a large European telco that has a significant presence in Africa, with whom we are doing a large R & D trial with their engineering department. We need to tick that box with them before we talk to their systems development people. We need to tick that box before their procurement people can buy it. That is six months + six months at least before you see any result.

Rigolle: The long term direction is for O3b to enter market segments with smaller and smaller ground equipment, with associated lower performance. A tier one terminal is for a telco what wants to get enormous amounts of data from point a to point b. Then there are services such as cellular backhaul, which require less bandwidth per antenna, and therefore a smaller antenna. So the type of ground equipment allows you to offer various products. Another dimension of product definition is that you can go up and down in one beam or between beams. For instance you can make a phone call from one part of Chad to another within one beam. Alternatively, someone on a 4G network in Chad, who wants to have access to Google, will be using two beams. Those are different products. The great thing is that this range of products and services can be supported with limited sets of different hardware. That’s why it is important we get the specs right. We want to get as many as possible tier two terminals out into the market which then can support a number of services over them.

Rigolle: The interesting thing about capacity pricing is that you sooner you sell it, the lower your prices. If you sell capacity pre-launch, the price is lower. As long as we remain in line with our debt covenants, there is no urgency to sell our capacity too early. We don’t want to sell out our capacity pre-launch. But, with the debt packages we are putting together, we are looking to provide the lenders with sufficient security and comfort. while retaining the ability to provide upside to equity investors. So, it is a delicate balancing act.

 

Rigolle: We are not giving deadlines. If you Google O3b, you will find articles mentioning us launching satellites in 2010 and 2011. Putting out dates does not make sense until we are fully funded. Stay tuned.

Rigolle: The regulatory situation varies enormously from country to country. There are countries with no specific regulatory requirements.  In many territories it is a formality. In some areas is more difficult. We have outsourced the regulatory work to experienced SES staff. They are a great help to us there.