Please don’t throw me into the briar patch!

Posted in Intelsat, Operators, Regulatory, SES, Spectrum at 4:50 pm by timfarrar

It took a while, but it seems that in April investors in Intelsat finally noticed my January blog post, and started to believe in the potential for a windfall from C-band monetization, causing the share price to jump from well under $5 to over $14 now. That’s brought out a lot of new skeptics, who are highlighting differences in both the share price performance and results call commentary at Intelsat and SES.

Some even appear to believe that SES is opposed to ever monetizing more than 100MHz of spectrum, when in fact Intelsat and SES have jointly conveyed the opposite message to the FCC, stating in April:

“For these reasons, Intelsat and SES have proposed an amount of spectrum clearing – 100 MHz available for terrestrial mobile use plus additional transition band spectrum needed to ensure that 5G operations are compatible with ongoing Fixed Satellite Service (“FSS”) to customers in the uncleared spectrum – that they believe can reasonably be accomplished within 18-36 months following a final Commission order. The Parties stated that if the terrestrial demand for mid-band spectrum is as robust as claimed, their market-based approach could result in additional spectrum being cleared in the future – but in a manner and timeframe that protects Intelsat’s and SES’s customers and their businesses.”

So it’s hard to understand why people would see Commissioner O’Rielly’s remarks that “To make this worthwhile, an adequate amount of spectrum – at least 200 or 300 megahertz to start – needs to be made available in this band” as a sign of opposition to a private transaction. That’s especially true when he also said that “This method provides an attractive option that should be thoroughly considered, particularly because of the speed in which it could bring the spectrum to market” and it aligns perfectly with Republican ideals, as described in Tom Hazlett’s book “The Political Spectrum”, that the FCC should allow market forces to reallocate spectrum to the highest and best use.

Certainly there are concerns about the pace of reallocation, given the complexity of moving current users around, and ultimately unwinding the substantial cross-subsidies from large to small cable companies that are inherent in the way distribution of content via satellite is paid for today. However, an outcome along the lines of “sell 100MHz now, then another 200MHz+ within 5 years” (with the option to clear the remainder within say 10 years), is certainly plausible.

At that point any complaints from satellite operators about being forced to clear too much spectrum would be reminiscent of Brer Rabbit saying to Brer Fox “please don’t throw me into the briar patch” because even skeptics like FT Alphaville indicate that the C-band spectrum should be worth more than the ~$0.13/MHzPOP paid in the recent UK spectrum auction (£1164M for 200MHz of spectrum from 3400-3600MHz), putting a valuation in excess of $20B on the entire 500MHz spectrum band.

Another concern expressed by skeptics is that any proceeds would take years to be realized, which is hard to comprehend for the first 100MHz of spectrum (worth $4B+ according to the FT’s assumption), since as in all spectrum sales, the buyer pays upfront and only then is the spectrum cleared. Indeed, if Intelsat and SES were to accept a pre-emptive offer for this initial slice of spectrum (as suggested in my January blog post), a deal could be even in hand at the time that a final FCC order is issued, rather than a process being run after the order is approved. Assuming the initial NPRM is issued soon (plausibly at the July FCC open meeting), that could advance the timing of receipts to the middle of 2019 rather than the very end of 2019 or more likely some time in 2020.

One remaining question raised above relates to the divergent performance of Intelsat and SES’s share price in recent months. But I think this is easily explained by investors believing that SES might well re-invest any windfall into more O3b satellites (where the ultimate return on capital is far from certain), while Intelsat will pay off its debts, stop spending money on new satellites, and return capital to shareholders.

Indeed if you believe that the future of large parts of the FSS industry could look a lot like the dial-up internet business in the mid-2000s, the best bet for Intelsat might then be to sell off its Ku-band data satellites to OneWeb and run the company purely to generate cash from running its legacy satellites and from monetizing its spectrum over time.

So despite me being one of the most skeptical people around on the ability of DISH, Ligado or Globalstar to realize a windfall from their spectrum holdings, I simply don’t understand why investors who apparently don’t know much about spectrum issues think now is a good time to be shorting Intelsat. In early 2017, I didn’t believe that Straight Path would find a buyer that was desperate to establish a leadership position in 5G spectrum in the shape of Verizon, let alone draw AT&T into a bidding war (not least because much more mmWave spectrum will be auctioned in the future). Though at least I wasn’t alone, because even Straight Path’s management was left in disbelief about the result.

But with that as the example, and the C-band now representing the most obvious (and perhaps only) opportunity to acquire a very large block of spectrum for high power mobile use, with much better propagation characteristics than mmWave spectrum and at a fraction of the price of DISH, Ligado or Globalstar’s spectrum, I think it would be foolish to assume that a Straight Path-like outcome won’t happen again.