Hedge fund managers are sometimes the earliest critics to point out the demise of once-dominant corporate industries, and Sahm Adrangi may be one of the earliest yet to correctly forecast the fall of many satellite companies. Sahm Adrangi wrote a report on ViaSat earlier this year, predicting the looming collapse of satellite internet. This follows his calls on other controversial companies in the telecommunications sector, many of which have been involved in the satellite subsector.
The US Satellite Industry Association reported that in 2017 global satellite industry revenues grew steadily, powered by consumer satellite television, satellite broadband, and Earth observation services. With an ever-increasing demand for bandwidth and advancements in technology, investors would think that satellite companies would make good investments, yet they need to consider each company individually.
Within the satellite sector, different companies provide different services or a combination of services including manufacturing and launch services, satellite communications, Earth observation, and navigation, often with a focus on niche areas such as mobile, television, civil/military, maritime, aviation, meteorology, and scientific. Sahm Adrangi has written on satellite companies including DISH, ViaSat, and Globalstar. Investors have to look not only at the markets in which each satellite company operates but also at new capacity offerings and competitors encroaching on one another’s territory, in order to make a well-informed investment in satellite companies. While 2017 may have been a positive year overall for the satellite industry, here’s a look at two satellite communications companies that experienced some challenges this previous year.
After high hopes of providing internet services to anywhere in the world via satellite, Japanese tech company Softbank failed to combine its satellite venture, OneWeb, with Intelsat SA, a Luxembourg-based satellite services provider. SoftBank would have invested $1.7 billion in and gained 39.9% control of the combined company, while the debt-laden Intelsat would have provided complementary service at a lower cost.
Intelsat operates a hybrid satellite and terrestrial network while OneWeb, which doesn’t have any satellites in space yet, is developing small satellites that would orbit much closer to earth than those of Intelsat and other similar providers. If the two had merged, they would have used their complementary radio-frequency licenses to provide internet access at a much lower price. It was also the hope of OneWeb’s creator, Greg Wyler, to connect poorer and rural parts of the world to the internet with new coverage areas at a lower cost. Much like how satellite TV broadcasters provide rural customers television alternatives to cable, OneWeb would provide an internet alternative.
The deal was contingent upon at least 85% of Intelsat’s bondholders agreeing to a debt exchange, where they exchange their current securities at a discount to the current market price for cash and shares in the combined company, thus leaving them with less than face value of their existing notes. Had they accepted that deal, Intelsat would have had cut down $3.6 billion of their more than $15 billion debt, which they previously incurred by going through two leveraged buyouts.
But Intelsat’s bondholders ended up wanting SoftBank to pay more, collapsing the whole deal. So now SoftBank and OneWeb have to look for different partners, and Intelsat has to go back to refinancing its debt or find a new partner willing to pay them more than SoftBank.
In addition to the merger failing, Intelsat late last year also experienced some criticism from industry leaders about its proposal with Intel to let terrestrial communications companies use satellite-controlled C-band spectrum (3700-4200 MHz) for future 5G networks. If the proposal is adopted, wireless operators would be able to use mid-band spectrum alongside satellite operators, which would retain ownership of the spectrum and auction the right for joint use of frequencies with terrestrial companies. Satellite operators generally disagree with sharing their spectrum because of concerns about interference.
Short Seller Attacks ViaSat
ViaSat also took a beating in mid-2017 when Sahm Adrangi’s Kerrisdale issued a scathing report and campaign against the satellite company, saying ViaSat should be worth half its price. Sahm Adrangi is known as a short seller, meaning his firm bets against companies and stands to benefit should those companies’ share prices fall. During the time of its report publication, Kerrisdale held a short position in ViaSat.
In its 56-page report, Sahm Adrangi claimed that while ViaSat is great at delivering broadband to airplanes, the vast value of the company is attributed to a business that sells inferior satellite-based basic home internet service to US consumers. While ViaSat long-holders believe that ViaSat is insulated from robust competition by its focus on rural households and will take share away from legacy telco and cable operators, Kerrisdale sees that thesis as critically flawed. The hedge fund argues that ViaSat’s technology is no match for terrestrial providers today, let alone over the next few years as terrestrial competitors dramatically increase speed, capacity and coverage through rapid technological advancements. Meanwhile, EchoStar’s new Jupiter 2 was already in the market while ViaSat was waiting for its next satellite to be operational, poaching ViaSat’s potential customers.
Furthermore, Sahm Adrangi argues that ViaSat uses non-core products and misleading reporting metrics to disguise it doomed principal business. Average Revenue per User (ARPU) has been inflated by non-core products that will erode under competitive pressure, causing ARPU to decline over the next few years.
In addition to the weakening competitive position, ViaSat is burning cash and accessing capital markets for external funding. Since becoming a satellite services company, ViaSat has never generated positive free cash flow. ViaSat needs the capital markets for another $1+ billion of capital over the next few years, which it will then invest in a business—satellite consumer home broadband—that will have mostly disappeared in the United States within 5 to 10 years.
Time will tell if ViaSat will be able to grow its consumer base for home internet service and keep terrestrial competitors at bay, or if Kerrisdale is correct in predicting the terminal secular decline of ViaSat’s satellite-based residential internet business.
Sahm Adrangi also created a standalone website, FactsAboutViaSat.com, where the report can be found, along with frequently asked questions from their discussions with key stakeholders, and additional research the firm conducted following its initial report on ViaSat.
This is not the first time Kerrisdale targeted a satellite company. In 2016 Adrangi raised $100 million for a fund to bet against DISH Network, and in 2014 presented his case against Globalstar Inc. in front of a live audience.