By now you've probably heard the news: Intelsat (INTE.Q) is merging with OneWeb. Or maybe it's buying OneWeb? Or vice versa? And doesn't SoftBank somehow have a hand in this deal?
There's plenty of confusion to go around, and that probably has something to do with the fact that Intelsat stock crashed 38% over the first three days since the news started filtering out. So let's break it down and see if we can clarify what exactly is happening here -- and whether it really is bad news.
Beam me up, Scotty! I just can't figure this satellite merger out! Image source: Getty Images.
What's happening?
Let's skip right past all the commentary posted on the interwebs and go straight to the source -- Intelsat's own website. What we find there is that Intelsat is describing this deal first and foremost as a recapitalization. That's actually the first line in their press release: "SoftBank Group Corp. to Capitalize Intelsat with $1.7 Billion Investment in New Equity to Effect Intelsat Debt Reduction," stated just below the headline in which Intelsat mentions that a "combination" between Intelsat and OneWeb will be made to effect this recapitalization.
Speaking of which, here's how the deal will go down.
The details
First, Intelsat and OneWeb will merge in a share-for-share transaction, in which OneWeb shareholders will trade in all their shares and receive Intelsat shares in exchange. Next, Intelsat will issue and transfer more shares (both common and non-voting preferred shares) to SoftBank, and receive $1.7 billion in payment.
Thus, the whole process basically breaks down into two parts: First, Intelsat buys OneWeb. Then, SoftBank buys a 39.9% interest in Intelsat.
In total, Intelsat will be issuing "approximately 800 million" of its own shares. In return, it will receive ownership of OneWeb, plus $1.7 billion of SoftBank's money.
While it's not stated outright, it appears that the surviving company will continue to be named Intelsat. It will also remain domiciled in Luxembourg, and remain listed on the NYSE. Intelsat's CEO will remain CEO. OneWeb's executive chairman will become executive chairman of the combined company.
Debt holders permitting, and assuming shareholders vote to approve the merger, this transaction is slated to close in Q3 2017.
What it means to Intelsat shareholders
Various sources are valuing this deal at anywhere from $7.8 billion to $13 billion and even to $18 billion. So how should you look at it? Try it this way:
Currently, after its massive sell-off, Intelsat has a market capitalization of just $430 million. That's with roughly 118 million shares outstanding. If Intelsat is planning to issue 800 million shares to, first, acquire OneWeb and then, receive $1.7 billion from SoftBank, then at today's $3.65-per-share price, the post-merger Intelsat's 918 million shares should be worth about $3.4 billion.
Additionally, going into the transaction, Intelsat carries $15.4 billion in debt, and has a bit less than $1 billion in cash on hand. Combine this with the hypothesized market cap, and we should end up -- when all's said and done -- with an Intelsat valued at:
$3.4 billion + $15.4 billion - $1 billion = $17.8 billion in enterprise value.
Speaking of debt...
That debt actually deserves a bit more discussion. Once Intelsat merges with OneWeb, this will affect the lenders who currently hold $15.4 billion in outstanding Intelsat debt. These debt holders will be asked to approve the merger, and also to approve exchanging the Intelsat debt they hold for new debt in the new company. The end result of this exchange, says Intelsat, will be "to reduce Intelsat's debt by approximately $3.6 billion." (That's assuming debt holders holding at least 85% of the debt agree to the exchange -- which they may not, which would scuttle the deal.)
But if they do agree, then this would presumably reduce Intelsat's outstanding debt, and its enterprise value, by $3.6 billion. Result: A new enterprise value of $14.2 billion.
Valuing the deal
Is that a good price for new investors? I actually think it might be. As it's a private company, we don't have much detail on OneWeb's profitability right now. But S&P Global Market Intelligence data show that Intelsat, at least, earned just under $1 billion in GAAP profits last year. Assuming OneWeb at least is not losing money, that implies that the post-merger Intelsat will be selling for a P/E of roughly 15 -- not a bad price for a dominant player in satellite communications. (If OneWeb is losing money, though, that might change the calculus.)
Final point: Let's not forget that in backing this deal, SoftBank is itself agreeing to pay $5 per share to acquire a 39.9% stake in Intelsat. If that price turns out to be the "right" valuation for Intelsat stock, then investors who stick tight and ride out the turbulence of this past week could stand to earn profits of as much as 37% when the dust settles.
