Closing Bell - Manifest Space: SES’s Intelsat Acquisition with SES CEO Adel Al-Saleh 4/30/24

Episode Date: April 30, 2024

SES is acquiring rival satellite operator Intelsat for $3.1 billion, in a deal that brings together two major communications satellite operators in a market facing increased competition. SES CEO Adel Al-Saleh joins Morgan Brennan to discuss the deal, the competitive landscape and where he sees the future of satellite communications.

SES is acquiring Intelsat for $3.1 billion, a combination years in the making. It's a deal that brings together two major communications satellite operators in a market facing increased competition from newer entrants like SpaceX with Starlink and eventually Amazon with Kuiper. SES CEO Adel Al-Saleh, who took the helm in February, says the timing was right as Intelsat repositions itself for growth post-bankruptcy and as SES envisions itself as a one-stop multi-orbit network. The transaction now is structured differently than the attempts before. It's an acquisition

versus then a merger. It's always simpler when you do an acquisition versus trying to create a merger and figure out what the governance is and who are the shareholders and who sits on the board, et cetera. So it was quite simple. And the value proposition we came up with was straightforward. It's $3.1 billion, all cash transaction. We acquired the company. And I don't look at it as an acquisition, honestly, Morgan. I look at it as a merger because we are similar size. We have similar markets. We have an incredible network of more than 130 satellites that will be in a combined company. So it's quite exciting.

And the timing was just right and it worked out for us. Expected to close in the second half of 2025, the new company will tout a fleet of more than 100 geostationary Earth orbit satellites and 26 more in medium Earth orbit. That compares with about 5,800 satellites and counting for Starlink in low Earth orbit. While the move to gain scale is being welcomed by analysts, the plan to take on some debt to do so helps send shares of Paris-listed SES tumbling. Consolidation, though, has been the industry trend, be it Viasat's acquisition of Inmarsat or Utilsat's purchase of OneWeb. On this episode, SES's new CEO discusses the deal, the competitive landscape, and where he sees the future of satellite communications heading.

I'm Morgan Brennan, and this is Manifest Space. AdeleSaleh, the CEO of SES, it's so great to speak with you today. You just announced you're acquiring Intelsat, $3.1 billion deal. Walk me through it. Morgan, thank you for having me. Look, it's a big deal for us as a company. The industry we're in is, despite people may think otherwise, it's highly competitive. It's fragmented. What we wanted to do is actually create scale. So this is a highly accretive acquisition for us because it brings two large players together and creates an incredible scale in multiple areas. And I think that's super important to compete in the future. Certainly. And the competitive landscape has definitely changed and shifted and continues

to evolve. I want to get into that a little bit more with you. But first, in terms of details around this acquisition, this has been speculated about for a number of years. Why is now the moment to get it done? Well, you look, circumstances change, right? I mean, the timing was the right timing this time. Myself and the CEO of Intosat, Dave Wasgras, spent a lot of time thinking about the value of the company combined. Intelsat went through significant transformation themselves. They were coming out of bankruptcy and did a phenomenal job pivoting the company to growth. Ourselves as well, we've been building a new strategy in terms of growth. And the transaction now is structured differently than the attempts before. It's an acquisition versus then a merger. It's always simpler when you do an acquisition versus trying to create a merger and figure out what the governance is and who are the shareholders and who sits on the board, et cetera. So it was quite simple. and the value proposition we came

up with was straightforward right 3.1 billion dollars all cash transaction we acquired the company we and i don't look at it as an acquisition honestly morgan i look at it as a merger because we are similar size we have similar markets we have an incredible network of more than 130 satellites that will be in a combined company. So it's quite exciting. Right. And the timing was just right. And it worked out for us. As reports started to surface that this deal was getting done, we did see SES stock sell off. There seems to be some concern in the analyst community about the debt that's going to be taken on to get this deal done. Walk me through that. Well, look, actually, I just had the analyst call earlier today. We announced it officially

earlier today. And we explained to the analyst that actually, when you look at the company on year one, we'll be slightly above 3.5 leverage ratios. And we will delever very, very quickly in the first 12 to 18 months. So we'll be below three times leverage ratio right after 18 months. So it's very, very fast. The company goes from being a $500 million free cash flow generator, well over a billion within a matter of 18 to 24 months. So it's highly accretive because we actually have a very good roadmap. And the biggest foundation of the value creation is synergies between the two

companies. As I said, Morgan, we're very similar in terms of what we do, how we cover the markets, how we invest. So these synergies are real, they're executable, and we will be going very fast in delivering that value. What gives you confidence that this gets through the regulatory approval process, especially since both companies do contract with the government, provide military communications-related services? Yeah, look, it's going to be hard work on our part. We've done a lot of work before getting to an agreement. We analyzed with all the experts in the market,

including our lawyers and Intelsat lawyers, and we're quite confident we're going to get it through the regulators. It just requires time. The market itself is highly dynamic, which will be in our favor. We have a lot of competitors. We have one very large one, SpaceX, and what they do with Starlink and Kuiper is coming into the equation. So there's plenty of players in this market to create competitive environments that the regulators should be very comfortable with. So let's talk a little bit about that competitive environment and what this enables these two companies together combined to do that maybe couldn't have been done or done quite as well separate. Okay, so let's go there. There's four value pillars that we'll look at. One of them is the financial transaction and the accretive nature

of the transaction, which we just, you and I just talked about. The second value is it creates a very strong network capability that nobody else has. So, we'll have more than 100 geo-satellites. These satellites cover the Earth. We will have more close to 30 satellites that are sitting in the MEO constellation, and we'll have a lot of strong partnerships that cover us in the LEO constellation as well. So with that network capability, we provide customers something that nobody else can provide today. It's a resilient, redundant network covering 99% of the earth with 5-9 availability. So that's the second value pillar. Morgan, you still there? I'm here. Okay. So because I lost your visual here for a second. So that's the first value besides the financial. The second one is around being able to build vertically specific applications. So think about the government, you just described it.

The ability of this combined company to provide what the government needs in terms of coverage, resilience, availability is really attractive, right, from a government perspective. The same thing when you think about aero, in-flight connectivity, or cruises. That's another area where we're very, very strong. And our final vertical is media. Although it is under pressure, satellite media delivery or distribution across the world continues to be the most efficient medium to distribute content, like sports and events, et cetera. So that is unique in a combination to be able to deliver this proposition to our clients. And then the last thing, Morgan, is all about investor return

and investor value creation. With this transaction, with this combination, we retain our investment grade and we're the only satellite operator in our space that is investment grade. We continue to commit to our dividend policies and move soon into a progressive dividend policies as we go forward. So there's a lot of value in this deal across all of these pillars. And if I just look at some of those end markets, where do you see the most growth? I realize you said, you know, media's sadly under a bit of pressure these days. But when we talk about cruises, or when we talk about, you know, government contracting, or when you talk about, you know, aerospace, airplanes, I guess, I guess, how are you thinking about it? Where do you see the most opportunity?

And what does that value proposition look like in a competitive marketplace? So Morgan, just coming back to the media, although top line is under pressure, it continues to be the highest cash generating business we have. And it will continue to be like that for many years to come, right? We have to keep in mind that the streaming technology that is taking over some of the content distribution that we have in our typical satellite media distribution cannot cover the earth, right? We have many communities that can't afford streaming services, but also don't have the terrestrial networks to be able to get it there. So satellites will continue to play a big, big role for those communities going forward. Sports and events is another application that, you know, that we need to make sure that

satellites are available, whether it's the Super Bowl or the NBA finals or whatever events that you think about. Now, coming back to the most attractive vertical, Morgan, government continues to be very, very attractive for all satellite operators. the world, led by United States, recognize that combining their government-dedicated satellite capability with commercial capability is the best way to build resilience and the best way to drive coverage. And there is plenty of demand in the market for multiple operators in that space. And that is a very attractive vertical for us. And with our combined capabilities, we actually have a unique proposition. But also, you know, Aero. Aero continues to be, you know, having Wi-Fi in the plane is no longer kind of a nice to have, especially at cross Atlantic or, you know,

global kind of routes. It becomes the must have in order to attract clientele. I don't know if you've been on the plane lately, but when I get on the plane, if I can't get an easy connection to Wi-Fi, I'm frustrated, the whole client, right? And that continues to grow. Big time, Morgan. Okay. Is there a situation in which you interface

with consumers directly, or is it really more business-to-business, enterprise-type opportunities? Yeah, no, for us, it's business to business. We have not selected the consumer broadband area as a key area of focus for us. We are all in business to business. Got it.

In terms of the fact that you do have this multi-orbit space network that you're now building out in an even bigger way with this combination, I guess, are there areas or types of satellite technologies that this now enables that you can now spend more time building out since you're not having to build out competing networks, essentially? It's a very good question, Morgan. So there's a couple of things that are happening for us strategically as we go forward. So first of all, we're launching some of the most advanced satellite technologies as we speak right now. We just went public with Empower, which is our MEO constellation, which is a very flexible

satellite technology to be able to reprogram the beams and move the satellites around depending on what application you're trying to serve. Our next launch satellites in GEO are all software-defined satellites. And what that means, basically, Morgan, is in the past, when we designed satellites, we designed them for the mission, and that's the only mission they serve for the next 15, 20 years, as long as they're in orbit. With new software-defined satellites, we're able to change the mission of the satellite during its life cycle multiple times. It's programmable. It's software-driven. We can deliver a mission in one location and then move the satellite to another location to deliver it. And that's what's happening. Digital beamforming technology, which is ability to point your satellite beams into the different areas of the globe that need the services and other evolutions that we're seeing.

So we see more and more of this. But for us, Morgan, given the fact that we play in all the orbits around the earth, his ability to connect these different orbits, the GEO to MEO to our partnerships in LEO, transfer data between them creates opportunities beyond what we're talking about. We had an experiment that we did with NASA and a company called Planet Labs, where we took their data, which is Leo constellation, moved it to a Mio constellation to deliver their Earth observation data real time to Earth. And that opens up just new areas for us. So these are some examples of the technology evolution that's happening in the satellite space. That's really fascinating. And certainly I know the folks over at Planet Labs well. They've been, have had done interviews on CN. It could be hours. It could be half a day. It could be the next day. Being able to move the data to a satellite that sits in a MEO constellation, which can deliver

the data real time, opens up the type of application you can be doing. So you don't have to wait for the data anymore. It can be available real time. Are there other ways to be thinking about how you can, I guess, navigate that multi-orbit platform then in that sense? I mean, is data transfer, are there other ways, are there collaborations where something like this can make sense and create like a new revenue stream? So Morgan, what we're trying to do is we're trying to think about our satellite

constellations as this space network, right? The backbone of network in space, where we can apply it to almost any application with open APIs to be able to hook in into the applications that the customers are using, make it easier for them to consume it, and then open up, of course, opportunities in multiple different applications that we haven't thought of today, right? And we owe a lot to the development of the industry where the applications and the use cases of satellites today are expanding massively. They're no longer just communications. They're all about data, about moving the data, connecting different neighborhoods, connecting different satellites and moving. And it's big data. It's AI, for sure.

We lose a lot of that in our operations and making sure that the satellites remain in their orbits, making sure that they're working the way they were designed to be. So there are a lot more new opportunities, I believe, that will emerge as we continue to refine this global network around the earth that's based in space. So you're a new CEO at SES. You just started in February. Did this deal come about that quickly? Were talks afoot ahead of time? I guess walk me through your first several months because you're certainly starting strong out of the gate here. What that process has been like. Well, look, I actually, as I was winding down in my old responsibility, started learning about space and satellites.

I'm an engineer by design. I spent all my career in technology. So it was not that hard to start learning some of the major and fundamental concepts of satellite industry and the business and spend a lot of time over the Christmas holidays and New Year and learning and spending time with the new team. And, you know, I was fortunate enough because there's been a lot of work done, as you mentioned in the beginning of this discussion, around this particular acquisition. Intelsat and SES have been in discussion. So we had a lot of data already that we didn't have to recreate understanding each other's businesses and where the synergies are and how strategically these fit. So as I joined, you know, we were fortunate enough because we had this incredible C-band proceeds that the company received. So

they had a very strong balance sheet. And my focus in the first few days was about how do we deploy that capital? Do we return it to the shareholders? Do we make a strategic move? Does it have to be big? Can it be in small components? And going through that, Morgan, we decided that this is the best thing that the company can do, both short-term, mid-term, and long-term,

to make sure that we create a formidable player in the space satellite communication sector. So final question for you. If we zoom out and look, I guess, along the horizon, past the horizon for the next, say, five years, ten years, where do you see this industry going? Where do you see this notion of connectivity in general and the role that space and satellites networks such as SES will play? Morgan, this is a super exciting industry,

right? Because we just talked about it, the use cases, the applications are just emerging. You've seen the deal that Starlink did with some of the agriculture companies, right? And what they're doing in terms of helping connect different vehicles and different equipment, et cetera. And that's just examples of things that are coming up and people inventing them. So my vision of this industry is going to be a fast evolving industry. Many new applications that will emerge as the technology improves, especially with this software-defined satellites where they become much more flexible, much more adjustable based on the requirement. And I think there'll be a big integration between the terrestrial and

non-terrestrial networks across all orbits. And you'll have connectivity that goes across the globe where you're connected all the time with whatever network you're using. It doesn't matter. It's going to be whatever is available to you wherever you are. Adele Alsaleh, CEO of SES. Thanks so much for joining me. Morgan, it's a pleasure. Thank you for having me. That does it for this episode of Manifest Space. Make sure you never miss a launch by following us wherever you get your podcasts and by watching our coverage on Closing Bell Overtime. I'm Morgan Brennan.