Wall Street analysts balk at Viasat-Eutelsat split on European broadband

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WASHINGTON — Eutelsat’s decision to scrap an investment in Viasat’s ViaSat-3 system in favor of a fully-owned satellite means the two companies will now be competitors in the European broadband market — a stance analysts view as bad for both operators.

Eutelsat on April 5 said it no longer intends to co-finance the second ViaSat-3 satellite, which Boeing is already building to bring massive amounts of capacity to Europe, the Middle East and Africa (EMEA). The Paris-based operator will instead tap Thales Alenia Space to build Konnect VHTS, a so-called Very High Throughput Satellite that will focus solely on Europe. 

“This is a net negative for all parties, in our view,” Wells Fargo Senior Analyst Andrew Spinola wrote in an April 5 research note to clients. “We believe the two companies were stronger together and the European market will be less attractive with two competitors instead of one.”

Carlsbad, California-based Viasat has over the past few years made satellite investments that leveraged a growing partnership with Eutelsat. The operator’s ViaSat-2 satellite, launched last summer, has a footprint that bridges aircraft travelling northern routes between the U.S., Canada and Europe with coverage that hands off to Eutelsat’s KA-SAT. Last year, when Viasat and Eutelsat created a joint venture to tackle European broadband together, the deal included a 132.5 million euro investment ($162 million) by Viasat for a 49 percent stake in KA-SAT.

A larger, reciprocal investment by Eutelsat covering half of the ViaSat-3 EMEA satellite’s $600 million-plus pricetag was planned, but lacked a binding agreement. Negotiations dragged on into this year. Viasat CEO Mark Dankberg told SpaceNews in March that determining which operator would claim revenues from respective customers was at the crux of the debate. “It’s just details,” he said. “It’s not like there are irreconcilable issues that we are beating each other up over.”

Eutelsat spokeswoman Marie-Sophie Ecuer said Eutelsat’s decision to order an all-electric satellite from Thales Alenia Space rather than invest in ViaSat-3 EMEA has “no direct impact” on the broader Viasat joint venture.

Satellite industry analysts worry the European market is too small for two operators to spar over with souped-up satellites. “In our view, the satellite industry needs consolidation, rather than additional capacity coming online,” Louie DiPalma, an analyst at WIlliam Blair, wrote in an April 6 research note.

Viasat issued a statement April 6 saying ViaSat-3 EMEA remains “well underway and on track.”

“[Viasat] believes there is significant interest in the ViaSat-3 program from prospective regional partners, as ViaSat-3 is expected to be the highest capacity communications satellite system in the world when it launches,” Viasat President and COO Rick Baldridge said in the statement.

Baldridge didn’t say when ViaSat-3 EMEA will launch, though Viasat has said it would follow within six months to a year of the ViaSat-3 Americas satellite. Viasat has a contract with Arianespace to launch a ViaSat-3 satellite in the second half of 2020, but hasn’t specified which satellite will use the launch. Eutelsat hasn’t announced a launch provider for Konnect VHTS, but said the satellite will be in orbit in 2021.

The total capacity of ViaSat-3 EMEA should crest 1 terabit per second, Baldridge said, delivering internet access to households, aircraft, boats, businesses and governments. Eutelsat’s Konnect VHTS, in contrast, promises half the capacity at 500 Gbps, but is substantially more concentrated with coverage just over Europe.

Which satellite will offer better performance will depend on more than just raw throughput. Each is already touting the flexibility of their satellites, meaning they will be able to adjust beam characteristics like shape, location and power to respond to changes in customer demand.

Eutelsat’s pullout of the ViaSat-3 EMEA investment caught some analysts by surprise.

“[I]n recent months it seemed the parties were moving closer to an agreement,” Ric Prentiss, an analyst at Raymond James wrote in an April 6 research note.“As a result, Eutelsat’s announcement of its commitment to build a new satellite and exit from the negotiations with [Viasat] were very surprising … the decision means risks around industry structure and competition have increased.” 

Eutelsat announced telecom heavyweights Orange and Thales as anchor customers for Konnect VHTS, acquiring an appreciable but unquantified amount of capacity for multiple years. But analysts are divided on whether Orange and Thales can outweigh Viasat.

“Viasat will have greater financial and operational risk in Europe without Eutelsat and we think Viasat was the stronger partner for Eutelsat than Orange/Thales,” Wells Fargo’s Spinola wrote. 

Jefferies Equity Analyst Giles Thorne wrote April 6 that capacity commitments from Orange and Thales appear “to be far longer than the standard 3-5 years,” for satellite broadband contracts, and “that the Thales option is superior to V-3 financially, operationally and technically.” He cautioned that “Eutelsat’s track record of execution in consumer broadband is poor,” however.

When launched at the end of 2010, Eutelsat expected its KA-SAT broadband satellite to fill up quickly, but the ramp up was appreciably slower than expected.

“Although we are surprised that the ViaSat-3 partnership fell through, there was definitely writing on the wall,” DiPalma wrote. “ViaSat has indicated it has had contingency plans if the EutelSat partnership fell through. While ViaSat has not disclosed what those contingency plans are, we would not be surprised if it announced them very soon.”

Spinola in an April 6 follow-up note, wrote that Viasat has an $800 million undrawn revolving credit line, and “would most likely consider a term loan for any future capital needs.”