M&A is kindling in satellite connectivity as executives see investment opportunities in a radically changed market.

Long the focus of speculation as a potential targetGogo (NASDAQ:GOGO) has joined aero and cruise connectivity peer Global Eagle Entertainment (NASDAQ:ENT) as they evaluate strategic options. Gogo is exploring a potential sale of its commercial aviation business, which would enable the inflight connectivity (IFC) provider to focus on its business aviation segment where it is seeing strong recovery. Gogo was unable to comment before this report was published.

A satellite operator is the most likely suitor in part because it would be able to manage network capacity and increase direct contact with the airline customers, according to Raymond James analyst Ric Prentiss.

In late July the US Bankruptcy Court OK’d Global Eagle Entertainment to access US$30m of US$80m in debtor-in-possession financing it obtained from an investor group.

The same month the company agreed to sell itself to lenders through a US$675m stalking horse bid, setting a floor for a potential auction. The bid came from a group led by Apollo Global Management, Eaton Vance Management, Arbour Lane Capital Management, Sound Point Capital Management, Mudrick Capital Management and BlackRock Financial Management.

Viasat and EchoStar

Viasat (NASDAQ:VSAT) CEO Mark Dankberg declined to say whether he would consider a transaction involving Gogo and-or Global Eagle Entertainment when an analyst asked him about them during the satellite broadband and IFC player's fiscal Q1 2021 earnings call in early August. However, Dankberg said aeronautical as well as other areas are potentially sectors of interest for a strategic transaction. A spokesperson declined to comment.

The Viasat-Gogo picture is a complex one, Prentiss said. Viasat is “bullish” on the long-term prospects of IFC services, but the near-term is a different matter. Fewer planes are in service, and passenger loads are decreasing, pointing to IFC revenue declines in fiscal 2021.

And the COVID-19 pandemic has created scheduling pressures on the first ViaSat-3 satellite, with plans calling for a mid-2021 launch. Viasat expects to provide an update to the timeline next quarter.

More broadly, Dankberg covered a wide range of acquisition possibilities for Viasat. This includes tuck-in deals with specific elements of technology or specific market segments or geographies. Deals that would boost the company’s defence and broadband sectors would also be welcome.

Something surprising is also not beyond the pale. “There’s also some potential opportunities to make interesting value propositions in some of our markets that could be enabled by some of these potential transactions,” Dankberg added.

Other potential buyers of Gogo assets include another IFC service provider to drive economies of scale or an avionics company to incorporate Big Data and information management, Prentiss said.

A deal appears a likelihood in the near-term if the reaction of Gogo’s investors is a measure. The company’s stock has spiked multiple times since rumours emerged in mid-August about a potential deal, once rising 17%, before retreating and then soaring again.

Consumer broadband operator EchoStar (NASDAQ:SATS) would consider strategic opportunities in broadband to increase cash flows, New Street Research Jonathan Chaplin said. 

EchoStar has US$2.5bn in cash to deploy while facing a low net debt level, he noted, adding that the company is well-positioned to advance its interests in a satellite sector where highly levered companies are “cash-starved”. Its satellite broadband provider subsidiary Hughes Network Systems in late July invested US$50m in UK-based broadband startup OneWeb, which is moving through a bankruptcy.

Long-time chair Charlie Ergen counselled “patience”, iterating this several times, as part of the company’s Q2 2020 earnings call. “I remember sitting in [a] poker game holding for eight hours, now you win the last two hands and you go home a pretty big winner. But you have to hold it for eight hours.”

He also suggested that EchoStar is undervalued, noting that the company’s EBITDA multiple is “materially lower” than that of “some other” companies. EchoStar’s adjusted EBITDA margin increased in the quarter to 41% compared with 34% last year, Hughes Network Systems CEO Pradman Kaul noted on the call.

It was the first time in two years and only the third time in a decade that Ergen participated in the EchoStar earnings call, Chaplin said. An EchoStar spokesperson declined to comment.

Hughes Network Systems’ broadband business is expected to be resilient in the US and strong in Latin America, Prentiss added, as that business represents some 71% of the company’s revenues. Its subscriber base grew some 26,000 additions in Q2 2020, reaching 1.542 million subscribers.

Latin America is expected to be a bright spot in the consumer broadband business of Hughes Network Systems, given recently constructed local gateways in the Brazilian market via a joint-venture with UAE-based satellite operator Yahsat. In 2019 the two companies announced a partnership to bring more than 65Gbps of Ka-band capacity to 95% of Brazil’s population, targeting consumer, enterprise, government, cellular backhaul and community Wi-Fi hotspot demand.

Speedcast targets October reorganisation

Australia-based satcoms provider Speedcast expects to finalise a reorganisation in October, a spokesperson told Connectivity Business, following the 13 August announcement of a US$395m equity commitment. The company anticipates filing the plan “shortly”.

Speedcast announced the commitment from investment firm Centerbridge Partners. The firm has also committed to providing up to US$220m in debtor-in-possession financing to Speedcast if it is needed. US-based satellite broadband venture Ligado Networks is a Centerbridge portfolio company. Centerbridge was unable to comment before this report was published.

The commitment would support a plan of reorganisation as the company remains in bankruptcy protection, which originated in April. Once Speedcast obtains court approval, certain creditors will have the opportunity to vote on the proposed plan, the spokesperson said. The court’s confirmation of the plan would clear the way for Speedcast to emerge from bankruptcy.

Moelis & Company is acting as investment banker for Speedcast, with FTI Consulting as financial adviser and Weil, Gotshal & Manges legal adviser and Herbert Smith Freehills co-counsel. Wachtell, Lipton, Rosen & Katz is proving legal advice to Centerbirdge. Berkeley Research Group is the legal adviser to the committee with Hogan Lovells as legal adviser.