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Making it up

Which was pretty much my instant thought when I saw that the guys who run satellite communications provider Inmarsat (ISAT) are recommending a 546p-per-share cash offer for their company from private equity. After all, just eight months ago the very same directors in no uncertain terms told a would-be bidder to get stuffed. Now they welcome with open arms another who is offering just 2.6 per cent more.

Okay, as we’ll see, there’s a bit more to it than that. But, on the face of it, not much has changed. Back in July, Inmarsat’s bosses said that a putative £2.45bn cash-and-shares offer from EchoStar (US:SATS) “very significantly undervalues Inmarsat and its standalone prospects”, adding that “the board remains highly confident in the independent strategy and prospects of Inmarsat”. Now, all of a sudden, Inmarsat’s bosses have concluded that the risks of remaining independent outweigh the likely rewards.

That’s quite a turnaround. When it announced 2018’s results earlier this month, Inmarsat, whose background is in providing a global satellite communications network for shipping and whose major growth opportunity is to supply in-flight internet connections to commercial aircraft, stuck to its main forecasts. These are that revenues from its Global Xpress high-speed internet connections, delivered via satellite, should be running at $500m (£380m) a year by the end of 2020. If so, they would account for approaching a third of the group total. Most of that growth would come from deals to supply airlines and, in that context, the group’s aviation revenues rose 40 per cent to $256m in 2018.

The number of aircraft signed up in those deals has grown steadily. Sure, chief executive Rupert Pearce complains about the time and effort needed to pin down provisional agreements. Even so, the number of aircraft included in in-flight connectivity contracts has risen from 950 in early 2017 to almost 1,600. And, says the company, in the pipeline are deals – not all of which will come to fruition – for a further 3,000 planes.

Once those opportunities are realised – or not – Inmarsat’s window will have closed and the group will move to its next phase when, as the directors said earlier this month, capital spending will “meaningfully and sustainably moderate” to be replaced by “sustained free cash growth over the medium to long term”.

That hardly sounds like the scenario in which bosses rush out to greet the next bidder who shows up. But the directors suddenly seem less confident that the cash flows will actually show up or that the capital spending will slow down.

In urging shareholders to accept the 546p cash offer, they now stress “the significant ongoing capital expenditure requirements and the timing uncertainties inherent in parts of Inmarsat’s strategy”. Yet, as if to seem even more confused, they also say – as I suppose they’re almost obliged to – “that Inmarsat’s existing strategy... should continue to generate attractive returns on investment for shareholders”. Actually, that little word “continue” looks entirely misplaced since Inmarsat hasn’t offered attractive returns for shareholders these past three years during which time its share price has fallen over 50 per cent even including the effect of this week’s bid.

However, one thing has changed since last summer’s would-be offer from EchoStar – the value of almost all satellite communications providers has come under pressure. Of the companies in the table, only shares in Inmarsat and Nasdaq-listed Viasat (US:VSAT) are higher than they were in July.

Inmarsat and its rivals     
CompanyShare priceMkt cap (£m)Profit margin (%)Debt/ebitdaPE ratio
Inmarsat 551p2,57221.82.926.2
SES € 14.055,48527.22.825.0
Eutelsat Comm's€ 15.543,15437.83.214.8
Intelsat$15.781,65443.68.5na
EchoStar Corp'n$35.462,56611.90.496.6
Viasat$76.133,495-5.57.1na
Source: S&P Capital IQ     

The deepest faller is EchoStar, whose share price has dropped 23 per cent. Quite likely, this has had a material effect on Inmarsat’s bosses’ decision to recommend the current offer. Recall that last summer EchoStar offered a combination of cash and shares. So a bid that was worth 532p per share back then is now worth just 475p, or 11 per cent less. As a result, the chances that EchoStar can come back with a convincing bid look slim, even though the company carries little debt.

If not EchoStar, then who might counter-bid? Possibly no one, since buying a rival satellite operator is not as simple as, say, putting together two retail chains and shutting the overlapping outlets. This might be why Inmarsat’s share price, at 552p, is above the private-equity offer price but not convincingly so. Now it’s the turn of the market, in its confusion, to make it up as it goes along. Enjoy the ride, knowing that 546p is underpinned.