(Bloomberg Opinion) -- The public market has again handed a present to private equity. A consortium of buyout firms and pension funds agreed on Monday to buy Inmarsat Plc for $3.4 billion, nine months after the board of the U.K. satellite group rejected a comparably priced offer from billionaire Charlie Ergen as too cheap. There’s been no colossal change in Inmarsat’s outlook since then. But the board’s view of the business is now taking second place to the need to give long-suffering shareholders a way out.
Inmarsat used to be a FTSE 100 stock, paying reliable dividends. More recently it has been plowing money into upgrading its maritime networks to broadband and providing high-speed internet for airplane passengers. Cash is going out of the business, but not to shareholders. Debt is rising, and investors have no idea when the situation will turn.
The all-cash offer of $7.21 a share is a decent premium to recent benchmarks. The deal gives shareholders an exit at a level that the stock is unlikely to reach on its own in the next 18 months of so. Lead investor Lansdowne Partners says it will accept.
But it looks like the buyers are on the better side of the bargain. The all-in cost including net debt and redeeming a convertible bond will probably be about $6 billion, or more than 9 times this year’s expected Ebitda. Probably only around $2.5 billion of that needs to be funded by equity, with the rest borrowed.
Assume Inmarsat’s investments start paying off and Ebitda hits $1 billion by 2024 – which isn’t crazy given what analysts are predicting in the near term. Assume also that the capital spending burden eases in a couple of years and the new owners can pay down some of that debt. The market has recently valued Inmarsat at less than 6 times forward Ebitda. But as recently as 2016, it traded at 11 times. Maybe this is one of those rare buyouts where an exit could happen on a higher valuation multiple than what was paid, if the consortium can present a less risky business to the world.
A sale in 2024 for $11 billion, with $3 billion of remaining debt, wouldn’t be entirely outlandish should Ebitda hit that $1 billion figure. That would see the firms make three times their equity investment, an internal rate of return comfortably over 20 percent.
There are risks to the business developing so strongly, of course. The public markets see these all too clearly. The growth in in-flight internet connectivity may not materialize, or may require yet more burdensome capex. Nevertheless, Inmarsat has a reasonably stable core business to the maritime sector and in cockpit navigation, even ignoring the growth potential. That puts a floor on its performance.
At least the board has got a buyer on the hook. It would take a counter-bid to force private equity to really pay up.
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Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.
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