Once a customer of Elon Musk and his SpaceX rocket company, Europe's Eutelsat (EUTLF 4.87%) is about to become...a competitor.

In the summer of 2016, Eutelsat earned at least a footnote in the history books when one of its satellites became the payload on an early SpaceX mission aimed at demonstrating the reusability of rockets. (The launch succeeded...the landing, not so much.) But now, Eutelsat wants to become a player in its own right -- not in launching satellites, granted, but in operating them.

Challenging SpaceX Starlink

With nearly 3,000 broadband internet satellites launched over the last three years, SpaceX Starlink is currently the largest satellite communications constellation in orbit -- and the largest satellite constellation, period. No one else comes close.    

But Eutelsat wants to try.

Last week, the French satellite communications company announced an all-stock transaction to acquire rival satcom operator OneWeb. In exchange for their existing shares, owners of OneWeb stock will receive 230 million newly issued Eutelsat shares. According to data from S&P Global Market Intelligence, this will precisely double Eutelsat's share count to 460 million shares, resulting in a market capitalization of $3.5 billion for the combined company.  

Post-merger, Eutelsat will own 100% of OneWeb. However, the British government will hold a "special share" that gives it rights to veto certain transactions with national security implications and favors use of UK companies for manufacturing and launching the company's satellites. The British government will own an 11% stake in Eutelsat itself, and India's Bharti Global Ltd. will own 19%.    

When completed sometime in the first half of the business year (H1 2023), the transaction will add OneWeb's constellation of 428 low Earth orbit (LEO) internet satellites to Eutelsat's existing 36-strong fleet of larger, higher-orbit GEO communication satellites. As Eutelsat explained, the transaction will thus create the world's only "integrated GEO and LEO player." The two constellations will become complementary, marrying the quick response time (i.e., low latency) of OneWeb's LEO satellites to the greater geographic coverage area and greater bandwidth of Eutelsat's GEO sats.  

The opportunity

Eutelsat believes the markets for B2B and B2C satellite internet will grow "by three and five times respectively over the next decade," reaching $16 billion (total) in global annual sales by 2030. That's a curious number, though, because according to internal projections from SpaceX, this satellite internet market will be worth more than $30 billion to SpaceX Starlink alone by 2025!  

Which of those two numbers ultimately proves correct remains to be seen. In the meantime, Eutelsat already sees good financial reasons to acquire OneWeb.

Consider that in the financial year ending June 2022, Eutelsat reported annual sales of $1.2 billion and net income of $241 million. Eutelsat doesn't see the revenue number changing much immediately post-merger. Projecting revenues from the combined company will remain near the $1.2 billion mark. But it does expect revenues to grow in the "low double-digit" range "over the next decade."    

On the profits front, Eutelsat thinks that combining the two businesses will yield $150 million in annual "revenue synergies" after four years, $80 million in "cost synergies" after five years, and "capex optimization" of $80 million more in the first year after the merger, thus potentially growing profits by a combined $310 million, or more than doubling Eutelsat's own profitability.  

That's assuming the projections prove correct, of course. In the meantime, for the first few years after the combination, Eutelsat intends to suspend payment of its generous 12.4% dividend yield -- a move that's unlikely to make this combination popular with its shareholders.

A risky gamble

That fact alone is suggestive of the financial strain Eutelsat may be taking on as it absorbs OneWeb and assumes responsibility for continuing to build out its new subsidiary's fleet of LEO satellites. It doesn't help, either, that Eutelsat will be racing to catch up to satellite internet leader SpaceX and also trying to maintain a lead over Amazon.com (AMZN 2.36%), which has announced plans to build its own internet satellite constellation, Project Kuiper.

Granted, Eutelsat probably thought it had to do something to goose its revenue growth rate -- projected to average barely 1% per year over the next five years. Granted, too, buying a complete start-up business like OneWeb has the potential to do the trick. But Eutelsat really does seem to be "betting the company" on this deal, and I'm not at all convinced it's a safe bet.  

Indeed, it seems it's already cost Eutelsat shareholders their dividend. We can only hope it won't cost them their shirts as well.