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Inmarsat 'in play' after Echostar bid, analysts divided
Inmarsat's rejection of a takeover approach, but not an offer, from US rival Echostar provoked a buzz among investors, with some analysts sharing the some excitement but others cynical.
RBC Capital Markets, which raised its price target from 725p to 850p, said the Echostar approach "puts Inmarsat clearly into play", with the company a "unique strategic asset" deserving of "a substantial premium".
RBC estimated Inmarsat's mobile satellite communications spectrum is worth circa £10 per share and that spectrum is "extremely important to Echostar and its sister company DISH", which are both controlled by Charlie Ergen, and would allow Echostar to use Inmarsat's spectrum and gain control of some of Ligado's own spectrum if Ligado were to go bankrupt.
RBC said counter bidders could come in the shape of satellite operators, large mobile operators or private equity. However rival satellite operators are seen as keen but somewhat hamstrung by debt, with ViaSat's balance sheet stretched and SES and Eutelsat, while both expanding fast into mobility as their core video business shrinks, but both struggling with leverage and low relative rating. Inmarsat's worldwide L-band is an Internet of Things opportunity "could make Inmarsat attractive to many large mobile operators", while private equity has a long history in the sector.
Satellite infrastructure is classified as 'strategic' by the UK Government making this political, however RBC noted that both Echostar and ViaSat have UK satellite operations that are regulated by Ofcom, that could be used as the acquisition vehicle.
In the bid defence section, RBC believes Inmarsat is on the verge of signing a deal to wholesale its fourth GX satellite for Chinese use, which analysts think could be worth around $100m a year.
Analysts at Numis were less bullish: "We think Echostar will not follow through."
Inmarsat's share price has climbed 33% in the last two weeks on hopes that Ligado cash may keep flowing in after FY18, in contrast to ISAT's view to date, capped off by Echostar's proposal.
"We do not advise shorting ISAT's stock but, unless the company's value prospects are better detailed than they have been hitherto, we think shareholders should reduce holdings if the share price climbs materially higher. This is because (i) we believe Echostar will not follow through, (ii) we doubt ISAT shareholders will get clarity over the likelihood and NPV of future Ligado cash soon enough, and (iii) we believe the threat from Iridium to ISAT's NPV will keep growing at pace."
After recent tinkering with its forecasts post first-quarter results, Numis's target price inches back to 430p from 450p per share.
● . After Friday's close, ISAT said Echostar
made "a highly preliminary and indicative non-binding proposal" to buy ISAT but this
"very significantly undervalued" the company. By 6 July, Echostar must declare "a
firm intention to make an offer" or walk away. The company has £3.6bn EV and just
0.5x net debt/EBITDA (incl. £2.5bn cash and equivalents). It earns most value from
selling satellite broadband connectivity in the US and the Americas, and delivering TV
channels for Dish, its sister company. Charles Ergen controls both corporates and is
also heavily invested in US spectrum. Echostar overlaps little with ISAT's business so
cost savings will be minor; it has no real involvement in L-band businesses (>80% of
ISAT's sales) so revenue synergies will be minor also. In addition, Echostar may have
to give up its European S-band license as ISAT owns the other of the two. Lastly, in
May, Echostar said it remains keen to consolidate the industry but current valuations
make some players "more reluctant to have a reasonable dialogue about valuations"