Shares in Eutelsat have slumped nearly 17% after the French satellite company confirmed it was in merger talks with OneWeb, a British rival part-owned by the UK government.
Eutelsat said it was in discussions with OneWeb, which provides broadband coverage from space, to create a business that would be 50/50 owned by shareholders in both companies. The British government owns nearly 20% of OneWeb, while French and Chinese state-owned entities hold stakes of 20% and 5% respectively in Eutelsat.
“Following recent market rumours, Eutelsat Communications confirms that it has engaged in discussions with its co-shareholders in OneWeb regarding a potential all-share combination,” said the French satellite firm, which owns almost 23% of OneWeb.
However, shares in Paris-listed Eutelsat fell 16.6% to €8.57 (£7.27) on the news, as analysts warned that OneWeb would require investment from a merger partner whose shareholders were used to a dependable business with stable cashflows. That cashflow will now be spread over more shareholders and could be called upon to fund more launches by OneWeb, said David Shnaps, an analyst at CreditSights.
“We would argue that Eutelsat’s shareholders were used to a mature business with relatively stable cashflow,” he said. “Not only will earnings and cashflow be diluted by the merger but the combined group will need to use its cash for further investments in the hope of high returns further down the line. This is a far riskier and longer-term cashflow profile for the group. It might prove to be a good long-term decision for Eutelsat, but it is certainly riskier.”
The tie-up aims to strengthen both companies in the race to build a constellation of low-orbit satellites, challenging Elon Musk’s Starlink and Amazon’s Project Kuiper. Eutelsat said it estimated the “satellite connectivity” market to be worth about $16bn (£13bn) by 2030.
The Financial Times reported that the governments of the UK and and France would each have board members in the new business created by the deal. It also said Sunil Bharti Mittal, whose Bharti telecoms business is the largest shareholder in OneWeb with a 38.6% stake, was expected to become co-chair of the business with an 18% shareholding.
“From an anti-trust point of view, this deal is likely to be scrutinised heavily,” analysts at Credit Suisse said in a research note. The merger talks come amid wider concerns in the UK over the impact of foreign takeovers in the industry. Another UK satellite company, Inmarsat, is in the process of being taken over for $7.3bn by a US rival, Viasat.
The UK’s Competition and Markets Authority said on Monday it was assessing whether a broader investigation of the Inmarsat-Viasat merger would be necessary on competition grounds – a routine step for large takeovers.
Tom Tugendhat, the Conservative chair of the foreign affairs committee and a recent leadership contender, had called for the government to review the Inmarsat takeover on national security grounds, but Viasat’s chief executive insisted any concerns could be managed easily as his company already had extensive relationships with the Ministry of Defence.
The UK government’s decision to step in to save OneWeb was controversial at the time. The £400m rescue package, which bought a third of the troubled telecoms company, was announced as providing a replacement for Galileo, the EU’s GPS competitor which the UK lost access to, despite funding, as a result of Brexit.
OneWeb specialises in low-orbit communications satellites, which operate closer to Earth and therefore deliver signals with less of a time delay. Eutelsat operates geostationary satellites that are positioned higher up in space and focus on broadcasting TV stations as well as operating shipping and government contracts. Satellite-delivered broadband is one of the solutions to connecting homes to high-speed internet services and 5G phone networks.
A source close to the deal confirmed that OneWeb would retain a UK headquarters and that the UK government would keep a “golden share”, which allows it to mandate OneWeb carrying out certain government contracts, as well as blocking any takeover of the new business.
All investors in OneWeb will roll their shares into the combined business, with OneWeb shareholders handing their shares to Eutelsat, which will then give them newly issued shares in the enlarged company.
