Over the past couple of weeks, at the Morgan Stanley annual TMT conference during the Mobile World Congress in Barcelona as well as the Verizon analyst day, the potential of 5G and the importance of spectrum has again been emphasized.
There has been a particular focus on mmWave and mid-band spectrum to enable network deployments. Despite this backdrop, the company has seen Intelsat’s stock pressured by a number of events. However, the firm continues to believe that the most likely scenario is that the FCC approves a C-Band Report and Order, perhaps in June or July, largely based on the C-Band Alliance proposal, although even in that situation, a wide range of monetary outcomes are possible.
Intelsat's stock has been impacted by negative headlines — the recent weakness in Intelsat stock has been attributed to a number of factors that include:
1) Weak 2019 core guidance
2) Rising opposition to the C-Band Alliance plans including from some in Congress
3) Talk of a national 5G network
4) Preston Padden stepping down as Head of Advocacy and Government relations at the C-Band Alliance.
Morgan Stanley does not see any of these issues derailing an FCC Report and Order later this year.
The C-Band Alliance plan remains the more likely outcome — despite these concerns, the company continues to believe that the administration, the FCC leadership and a number of the carriers are keen on moving forward rapidly with the C-band process to help drive 5G deployment in the U.S.
The 3.7-4.2 GHz band continues to become more important globally as a key 5G component. Regarding timing, the NPRM was released last June and, despite the government shutdown, Intelsat recently noted “regarding timing, we are still expecting the timing to be roughly the middle of the year, as the last word from the FCC was they wanted to get an order out in the second quarter of 2019.”
The C-Band plan is likely the only feasible way to get the spectrum transferred during the life of this administration, as a move to an alternative process would likely move past the next election.
Factors influencing spectrum valuation — despite the firm's positive view on the likely path, there is plenty that could delay or derail the process, with potential litigation possible if the Report and Order is supportive of the C-Band Alliance plan. There are several key factors which remain outstanding which will likely be key to determining the value of the spectrum including:
1) The band plan and sale process
2) The outcome of the Sprint/T-Mobile merger
3) Potential taxes, fees etc.
On the windfall gain issue,the company notes that the broadcasters did not pay for the spectrum they sold in the broadcast incentive auction in 2017 for more than $10 billion. (Telecom Services & Cable/Satellite: 5G Spectrum Primer).
Valuation discounting c. $18 billion in gross spectrum value — the company notes that at last night’s (March 5) closing price of $17.76, the current Intelsat enterprise value include an estimated $5 billion plus of net proceeds for spectrum if an assumption is made that the satellite business is valued at c. 7x the mid-point of 2019 EBITDA guidance. That equates to c. 32 cents per MHz/pop or c. $18 billion in gross proceeds, using 180 MHz and assuming $2 billion of clearing costs, a 30 percent haircut for taxes and fees and a 45% share to Intelsat.
Valuation
The price target valuation is based off a 7.0x satellite EV/EBITDA + 37.5c/MHzPOP C-band value
Key Risk
- Increased competition
- Bidding wars over satellite service prices as supply grows. Several competitors also have high throughput satellites (HTS) coming online. These HTS could lower pricing across the existing fleets.
- Satellite anomalies – Intelsat’s revenue growth is highly dependent on additional capacity from upcoming satellite launches
- Weak credit markets – Refinancing debt at attractive rates may be dependent on market conditions
- FCC decision on C-band – A FCC decision on how to repurpose the C-band for mobile use may vary from Intelsat's preferred outcome.
