SES and Intelsat are on the verge of signing a $10 billion deal to form a satellite giant

SES SA satellite company is in talks to merge with a satellite giant called Intelsat SA, creating a giant that can compete with billionaire Elon Musk's SpaceX.

The Luxembourg-based satellite company SES announced Wednesday that it is currently "engaged in discussions regarding a possible merger with Intelsat," confirming in an earlier report. It's not guaranteed that a deal will materialize, but SES said its board continues to remain "fully committed" to acting in the best interest of its shareholders, and a deal is not certain to take place.

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The companies are currently in advanced negotiations with each other and aim to reach an agreement as soon as within the next few weeks, according to people with knowledge of the situation. It is estimated that the combined business would be valued at more than $10 billion, including debt, if the transaction went through, according to people who asked not to be identified due to the nature of the information. 

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There was no comment from Intelsat's representative regarding this matter.

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During the day of trading in Paris on Wednesday, SES depositary receipts surged as much as 10%, the largest intraday gain since August 2021. Its market value was €2.6 billion ($2.9 billion) at the close of the trading session, up 3.7% from its opening price. The price of Intelsat's secured bonds due in 2030 has increased 5.6 cents on the dollar to 89.6 cents, which represents the biggest gain since they were issued last year, according to Trade Algo.

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Cost Savings

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In an era when SES is facing fresh competition, a combination could prove to be helpful for bulking up in the long run. The plans by Musk and his fellow tycoon Jeff Bezos to launch thousands of spacecraft into lower orbits and cover the globe with fast broadband have pushed the traditional satellite industry into mergers as a result of their plans. 

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Credit Suisse Group AG analysts such as Pilar Vico wrote in a research note Wednesday that the market was heavily fragmented in a sector that is critical to scaling. The note said that there were still about 55 operators around the world. "There has the potential to be a great deal of synergy between the two companies." 

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SES and Intelsat own a combined 40% market share for fixed satellite services, according to Goldman Sachs Group Inc. Andrew Lee and other Goldman analysts said that the combination would help SES better position itself in a changing market where new entrants and disruptive technologies are expected.

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As the largest shareholder in SES, the Luxembourgian government would need to approve any acquisition.

Moonwalk

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Viasat, based in California, agreed in 2021 to buy Britain's Inmarsat Group for about $4 billion in cash and shares, while Eutelsat Communications SA, based in France, agreed to buy OneWeb Ltd. for $3.4 billion in all-stock transactions.

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Intelsat emerged from bankruptcy in February last year after cutting its debt pile of $16 billion in half in the process. Prior to being privatized in 2001, the corporation was established in 1964 as an international consortium and televised the first moonwalk. In 2008, the private equity companies BC Partners and Silver Lake bought it.

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CMAQ pricing indicates that the cost of insuring SES's debt against default for five years is set for its biggest increase on record as a result of the surge in prices Wednesday. 

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In light of Eutelsat's proposed tie-up with OneWeb, which caused its bonds to lose up to 10 points as a result of the proposed tie-up, there is a possibility that SES bonds may be sold off in the near future. 

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Luxembourg Castle

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Located in a castle in Luxembourg, SES beams a wide range of content to broadcasters around the world, including Sky TV, as well as providing broadband connections for clients who are remote from traditional internet services, such as cruise ships and aircraft. 

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The company is right to pursue such a combination in light of the broad operational overlaps between the two operations and the secular decline in the core video business, which could result in significant cost savings for the company. Even so, these overlaps imply the need for close regulatory scrutiny, perhaps triggering a number of remedies large enough to deter any transaction from being attractive as a result.

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The chief executive officer of SES, Steve Collar, has previously described space as being "essentially a fixed-cost industry with the potential for enormous financial benefits from consolidating." Several people familiar with the matter have confirmed to me that the company has been working closely with an adviser about a possible takeover of Inmarsat in 2021.