Consolidation, consolidation, consolidation. It always has been a buzzword in the satellite industry, but after an intense round of activity that produced some significant transactions among satellite operators, are other sectors preparing to pare down their numbers as well? Is the industry entering a period of relative calm or will the number of  satellite players, especially in Europe, be cut even further?

Earlier this year, SES was unsuccessful in bid to acquire assets owned by Israeli satellite operator, Spacecom. The move showed that despite an abundance of activity in recent years there are still potentially deals to be made as operators look to improve their global coverage. So where might be the next level of deals be done and who will they involve?
“I think there are a few possibilities out there,” says Mathieu Robilliard, a satellite equity analyst at Exane BNP Paribas. “You have Hispasat, for example. There is Hellas Sat that could be a target one day. There are a few things out there but these are likely to be relatively small deals.” Eric Beaudet, a satellite equity analyst at Natixis Securities adds, “SES and Eutelsat are interested in possible acquisitions, so I believe both operators will look to do some things. But having seen that a couple of deals have failed, such as Eutelsat’s bid for Satmex and SES’s bid for Spacecom, it shows that they will only do things at the right price.”
With SES and Intelsat established as the two major forces in the fixed satellite services (FSS) world, one of the key questions in the consolidation space is whether Eutelsat will look to bridge the gap on these two. Maury Mechanick, a counsel for Washington-based law firm White & Case, believes there is “compelling logic” to a possible combination of Eutelsat and Telesat. “They are essentially the number three and four global players but each lagging far behind Intelsat and SES. Also, their footprints are quite complementary. In my mind, it is not a matter of if, but only when.
However, Hoyt Davidson, president of Near Earth LLC, believes such a combination currently is unlikely currently. “A Eutelsat-Telesat combination would make for a strong third player and support more global ambitions, but it would be expensive and difficult in today’s tight credit markets. It would probably also require a spin-off or separate transaction to keep [Space Systems/Loral] in U.S. hands.”
While not commenting directly on a possible link-up, both Dan Goldberg, CEO of Telesat, and Giuliano Berretta, CEO of Eutelsat, see potential synergies between the two operators. “We were certainly interested in Telesat when it was on the market a year ago, although Loral’s offer was too good to be refused,” says Berretta. “Any collaboration with Telesat could be profitable in the future as I think we are very complementary. With Dan Goldberg, I think we could do many things together.” Goldberg adds, “Eutelsat has a very strong business built around their Hot Bird assets serving Europe. Telesat has a global business but with a particular strength in terms of [direct to home] in North America. Telesat and Eutelsat are complementary businesses that would fit together well, but I would say that Eutelsat has a lot of growth opportunities that they are pursuing. I watch what they are doing with great interest, including their Ka-band activities and their S-band plans.”
Abertis, the Spanish infrastructure company, also could play a crucial role in future operator consolidation. The company acquired a 32 percent stake in Eutelsat at the beginning of 2007 and recently received approval from the Spanish government to proceed with the acquisition of a 28 percent stake in Hispasat that would make Abertis the largest shareholder in the Spanish satellite operator.
Kristof Samoy, a satellite equity analyst at KBC Securities, believes these moves could lead to a merger of Eutelsat and Hispasat. “While the Spanish government currently opposes a merger with Eutelsat, a separation of the Spanish defense satellite business might eventually result in a full-blown merger,” says Samoy. “The latter would yield important cost synergies in satellite procurement, launch services and insurance. On top of that the European and African foot print would be expanded to Latin America.”
But Tobias Martinez, managing director of Abertis Telecom, discounts that idea. “Both companies have different shareholders, but from our point of view, we as Abertis Telecom could improve the growth of both companies by playing our role as an industrial partner,” he says. Abertis Telecom would “continue to assess opportunities that emerge in the market and that fit with its business approach,” he says.
Beaudet adds, “The Socialists have won power in Spain, so I don’t think anything will now change in terms of Hispasat. If the Right had won power, they perhaps would have been more interested in selling some shares to a French shareholder. There will be some more consolidation coming, but it is very difficult to say who it will be. It will probably be small actors.”

Regional Plays

Rather than focusing on further consolidation of the largest operators, Berretta believes the next round of transactions would see big operators picking regional assets. “There will be certain assets that come on the market which could add greater scale to our business,” he says. “After a major wave of consolidation in recent years the only thing that will remain will be smaller players who don’t have the dimension to compete effectively or large players that may offload some of their in-orbit assets. I think there will be some of these types of assets on the market in the short-term future. We will analyze what comes on the market and look carefully at what brings synergies in terms of frequencies, orbital locations, business opportunities and overall profitability.”
Along with Eutelsat, SES could be one of the more active players in these types of deals, says Robilliard. “I think SES is generally looking to increase its size and complete its coverage,” he says. “I think they will be looking at adding orbital positions that they don’t have. SES wants to get bigger and there are always some synergies by merging with smaller companies. I think SES is pretty open to any region. Both Eutelsat and SES have gaps in terms of where they want to get stronger. Eutelsat is not present in Latin America or China or in the Far East. That is one obvious spot for them.”
“I do think that SES will look with great interest to regional acquisitions,” says Mechanick. “Given its size, I doubt if SES can do any more monster deals, so acquisition of some smaller regional players is certainly a more realistic approach. Also, unlike Intelsat, which was always a global system, SES has become a global system more or less on a piecemeal basis, so there still may be some gaps in its total global coverage capabilities that could be filled by the acquisition of additional regional players,” he says.
While SES most likely will look for more assets the operator plans to deviate from its previous policy of taking minority stakes in operators such as AsiaSat and will look for assets that it can acquire full control over. “(If we make an acquisition), it has to be profit positive from year one. It has to be complementary. You need to have control of the acquired company. You need 100 percent control,” says SES CEO Romain Bausch.
This strategy could be seen in the attempted acquisition of Spacecom, says Sarah Simon, a satellite equity analyst at Morgan Stanley. “This thus looks like the exact type of deal envisaged by SES management in recent months,” she says. “Commentary regarding [mergers and acquisition] has focused on the attractions of small-to-medium sized add-on transactions, which would allow SES to improve its geographic reach by filling in coverage gaps. Amos is strong in the Middle East market as well as in Central Europe, where it has clients in Romania, Hungary and Poland.”
Whether SES can resurrect this deal remains to be seen. Spacecom CEO David Pollack says the operator is well-placed to grow revenues, continuing to make it an attractive acquisition target. “Spacecom’s revenues are expected to considerably increase after Amos-3 is launched due to the fact that Amos-3 is fully owned by Spacecom, and it replaces Amos-1, which is owned by [Israeli Aircraft Industries] and operated by Spacecom. I can also add that as we approach the launch of Amos-3, the demand for our satellites’ services in the Eastern and Central Europe regions as well as the Middle East is growing.”
Beaudet believes SES could look to North America. “I think SES will try and buy some of Intelsat’s assets in North America. Intelsat has very high debt and will probably spin-off a couple of satellites that SES is willing to buy. However, I don’t think Eutelsat will be interested in these assets. They are not in North America. Having just a couple of satellites is difficult to find synergies. I think SES will be a front runner in that sense. I think Eutelsat will concentrate on Eastern Europe, Africa, South America, etc.” Robilliard adds, “Clearly there is an interesting question regarding Intelsat: Will it be looking at disposing some assets to reduce its high leverage? It is a pretty safe bet to assume that both Eutelsat and SES would be ready to look at some of Intelsat assets.”
Davidson pinpoints the Middle East and North Africa as potential regions of interest for these regional acquisitions. “I would expect SES and Eutelsat to seek acquisitions, but generally for non-European markets. I would expect SES to look for more regional players to acquire. The Middle East and North African market is showing good growth and so a natural place to look for more coverage.”
Mechanick also sees Asia as a potential area of interest for European players. “Clearly, the regional players are now emerging as real targets in the next round of acquisitions for all of the major satellite operators — whichever side of the Atlantic they are based on. I would definitely anticipate that European players would be very interested in regional assets and the underlying alliances that such acquisitions would signify, particularly in Asia.”
Robilliard believes Eutelsat also would potentially be more interested in emerging markets rather than North America. “I am not sure that North America is a priority for Eutelsat in terms of where they want to be in the next three to five years. I think they are probably more interested in looking at opportunities within emerging markets. That could be South America.”

Other Sectors

With the FSS industry in a transition phase, and with perhaps the major operators looking for smaller scale deals, the question is what other sectors might see some interesting strategic moves. Of all the sectors in the satellite industry, the one which is ripe for consolidation is the mobile satellite services (MSS) segment. With Inmarsat being one of the strongest players here, and technically a European company, the question is how proactive it would be in terms of consolidation. The operator’s recent agreement with Mobile Satellite Ventures (MSV) could hint at a more active approach towards teaming up with fellow operators.
“MSS consolidation makes sense to aggregate more spectrum to attract terrestrial partners, but with several MSS players recently raising funds it may be a while before they are forced for financial reasons into consolidating,” says Davidson. “The need of future terrestrial partners for greater bandwidth will most likely be the stimulus for consolidation, but which one will come first?”
Consolidation is the MSS space is “absolutely essential,” says Mechanick. “The conventional wisdom seems to be that consolidation activity will heat up once the U.S. 700 MHz spectrum auction has been completed, and the winners and losers in that process are then known. Whatever market potential may exist, there is no way that six or more MSS operators with satellites in orbit and extensive [ancillary terrestrial component] or [complementary ground component] networks constructed on the ground can economically survive. Failure to consolidate soon could doom them all to failure rather than allowing for a more orderly maturation process that could enable at some to survive and prosper.”
Andy Sukawaty, Inmarsat’s CEO, expects the numbers of MSS players to shrink throughout the next year. “I don’t think people have fully absorbed the current state of the markets, at least I didn’t detect it at SATELLITE 2008,” he says. “Let me put it this way: Business plans far less speculative than people were talking about on the MSS panel are not being funded as we speak. The debt markets are closed. The equity markets for an [initial public offering] are closed. It is not clear how long this situation will exist. Even if we come out of this, I think it will be a while before the kind of funding that is required becomes available. If you add up all those players and their funding needs over the next 24 months, I don’t see how it will get done.”
Other areas of the European space industry are unlikely to see such movement. While Thales Alenia Space and EADS Astrium seem to be more cooperating more than they have in the past, the $1.7 billion Yahsat deal being a prime example, consolidation in the satellite manufacturing space looks unlikely as the space has been pretty much bereft of consolidation throughout recent years.
In terms of the direct-to-home (DTH) segment, most of Europe’s major markets now only have one player. In fact, only in the Nordic region is there real DTH competition. However, the interesting aspect is whether telecommunications companies will look to use satellite technology to boost their IPTV offerings. In essence, they could return full circle and look to satellite assets.
In the technology and set-top box business, Pace Micro Technology, a U.K.-based company, has acquired the set-top box and connectivity solutions business of Royal Philips Electronics. The transaction, valued at 68 million British pounds ($135 million), signals Pace’s intent to become more of a force on the set-top box landscape, which will make the company more of a force in the satellite sector, says Pace CEO Neil Gaydon. “It gives us more satellite customers than we have today. For example, Philips supplies satellite products into Brazil and Mexico and, in Europe, to operators such as Canal+, who are not currently Pace customers,” he says. “Philips is a market leader in mainland Europe, with customers such as Canal+, Numericable, Telefonica and Sogecable. They are also strong in Latin America and the [United States]. This supports our position as market leaders in Scandinavia, Western Europe, Africa and Australasia. In America we work with over 40 cable customers, including Comcast, and with the leading satellite operator DirecTV, which Philips also supplies.”
In the conditional access (CA) and security arena, a plethora of companies such as NDS, the Kudelski Group, Conax, Irdeto, Viaccess are based in Europe. Consolidation has long been discussed as a necessary action to cut down a crowded field. No major moves have yet been made, thought Viaccess recently announced a deal to acquire Israeli middleware company Orca Interactive. François Moreau de Saint Martin, CEO of Viaccess, says this will help the company procure business with satellite players. “It is not a pure IPTV story. What we are doing now is that we are mixing the footprint of the type of product we can bring to customers,” he says. “ The solutions from Orca will help us get business with satellite players who want to launch hybrid services. Broadcasters will want to launch hybrid services. This acquisition will help us in the IPTV market, but it will also help us with broadcasters and satellite players who have new projects in this area. I see that satellite players are looking to hybrid services.”

Bottom Line

It is likely to be a quiet year in terms of consolidation within the European space arena. While a major move can never be discounted, history suggests that SES may make the odd regional move, and that Eutelsat will concentrate on its organic growth strategy. In the MSS sector, Inmarsat has its hands full with making its Broadband Global Area Network strategy success as well as boosting its prospects in markets such handheld services. However, with the MSS sector likely to be a hotbed of activity, do not rule out a move here. It should be exciting year, although we may not see huge amounts of activity in terms of consolidation in the European space arena.