Intelsat’s Battered Investors Defy Risk With Bets on C-Band Sale
(Bloomberg) -- A catastrophic November for Intelsat SA hasn’t scared off bulls clinging to hopes the satellite operator will score a big payday selling wireless spectrum to cell phone companies.
Despite losing more than three-quarters of its value last month after being dealt a blow by the Federal Communications Commission, nearly half of Intelsat analysts tracked by Bloomberg still have buy ratings.
At the heart of their optimism is a belief the market is taking too dim a view of the company’s prospects to cash in on the sale of so-called C-band radio spectrum, which it controls -- or thought it did. Satellite operators suffered an interstellar sucker punch last month when the FCC got in the way of their plan to sell the bandwidth directly to mobile phone operators, raising the prospect of a public auction process in which the government gets almost all the money.
It’s the kind of risk you take betting on companies as heavily regulated as Intelsat, which went public in 2013, a half century after being formed as a governmental consortium hitched to President John F. Kennedy’s space-race ambitions. Bulls on the stock think the lion’s share of the cash generated by the spectrum sale will still filter back to Intelsat.
“We think the spectrum is going to go for a much higher price than folks realize,” said Vivek Stalam, a New Street Research LLC analyst whose $34 price target is the highest on Wall Street. “Some folks think in a public auction process the majority of the proceeds go to the government. We simply think that’s not the case.”
The airwaves in question are now being used to deliver video to TV stations but are coveted by mobile communications providers who aim to use the spectrum to build the next generation of wireless networks, known as 5G. Intelsat and its partners laid out a plan sell those assets in a privately run auction, which they argued would ensure a faster sale.
That plan was shot down on Nov. 18 in a tweet by FCC chairman Ajit Pai, who has faced congressional pressure to avoid creating too big a payday for the satellite firms. Instead of a direct sale, Pai is proposing a public process that could result in almost all of the money going into government coffers, except for payments to adjust to the new use of the airwaves.
Pai pledged to get the auction started in 2020. The FCC could provide a detailed proposal on the process in time for a vote at its next monthly meeting on Jan. 30. Such a move usually is followed by a months-long rulemaking process to answer procedural questions.
In general, analysts who say Intelsat is a buy at its current level, around $6, are arguing that denying satellite operators proceeds of the spectrum sale is unfair and impractical. Too much work is needed to free the space up for mobile network operators, and unless those firms are paid, it will never get done, according to Adrian Keevil, a partner at Plustick Management, which holds Intelsat shares.
“We needed this C-Band spectrum yesterday,” Keevil said in an interview. Setting the bandwidth up for terrestrial use, a process known as clearing, “is an enormously complex undertaking, especially while ensuring the networks don’t have any service interruptions,” he said.
Without the participation of satellite companies like Intelsat and SES SA, it’s “impossible to imagine” the C-Band being freed up, said Keevil.
If the satellite companies don’t like what they get, they’ll “say we’re not going to do the clearing,” said New Street’s Stalam. That would force the FCC to delay the auction or conduct it with “an incredible amount of uncertainty” about how the spectrum would be cleared, likely resulting in auction proceeds at a fraction of the amount expected under the original plan, he said.
Intelsat declined to comment on that scenario and remains optimistic the FCC’s plan to hold a public auction for the airwaves, rather than a private one, can be fair to satellite companies while enabling 5G in the U.S.
“Now that the FCC is moving forward with a public auction, the auction should be conducted in a way that the full value of the spectrum is realized, and in a manner that the satellite operators which hold the licenses and have invested billions in the band are treated fairly and incentivized to clear the band quickly and safely,” said Dianne Van Beber, vice president of investor relations for Intelsat.
Congress may still be heard from in the debate. It has the power to dictate FCC moves, and is showing interest. A bill that would limit the companies’ payout to half the value of the airwaves cleared an initial vote with Republican support in the Senate Commerce Committee on Dec. 11, overcoming Democratic objections that the measure still left room for billions of dollars to go to the non-U.S. satellite providers. The bill needs additional votes before becoming final.
While other satellite companies like SES also have a lot riding on the sale, Intelsat’s shares are the most sensitive to expectations around the event. That’s mainly a function of the Luxembourg-based company’s more than $14 billion debt load. Intelsat has pledged to use a portion of the proceeds to pay down that debt.
Intelsat began as the International Telecommunications Satellite Organization in the 1960s, providing broadcast services through a network of satellites. The intergovernmental consortium was privatized in 2001 and merged with rival PanAmSat in 2006. Intelsat went public in 2013 with a market capitalization of $1.9 billion.
While bulls anticipate auction proceeds could exceed $50 billion, others are less optimistic about what companies like Verizon Communications Inc. and AT&T Inc. will be willing to pay. That’s partly because there isn’t a clear path to the sale, according to JPMorgan analyst Philip Cusick. He expects an auction could generate around $30 billion but he’s skeptical that it will be completed in a timely fashion.
“The underlying problem is there’s no one on the government side -- the White House, the FCC or Congress -- who is empowered to stand up and say this is what we need,” said Cusick, who has a neutral rating on Intelsat and $9 price target. “We’re going to do a public auction, but how are we going to do that? Nobody knows as far as I can tell.”
That uncertainty has attracted short sellers, who have continued to add to bearish positions even after the rout in mid-November. Short interest has increased to 30% of shares available to trade, up from 23% on Nov. 19, according to financial analytics firm S3 Partners.
Another wrinkle is that Intelsat’s core business is in decline. Sales have fallen in four of the past five years and are expected to contract another 5% this year. Intelsat gets the bulk of its revenue from media distribution and network connectivity services. Those two businesses accounted for 80% of Intelsat’s revenue in the third quarter.
--With assistance from Todd Shields.
To contact the reporters on this story: Jeran Wittenstein in San Francisco at jwittenstei1@bloomberg.net;Joshua Fineman in New York at jfineman@bloomberg.net
To contact the editors responsible for this story: Catherine Larkin at clarkin4@bloomberg.net, Chris Nagi
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