EchoStar’s Charlie Ergen: Inmarsat bid refusal a disappointment, industry needs scale and broadband is the future

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WASHINGTON — EchoStar Chairman Charlie Ergen said analyst missed synergies apparent in an EchoStar-Inmarsat merger, and that the satellite industry needs bigger players to tackle the mammoth global need for connectivity as satellite operator strength shifts from television to broadband.

Ergen, who co-founded U.S. satellite television giant Dish Networks and remains its chairman, said the satellite industry is in the middle of a “fundamental paradigm shift” where the future lies in providing internet access, likely through satellites in multiple orbits. Most companies — EchoStar included — are too small to fully grasp that new future, he said.

“Scale matters in the satellite business, and I think that virtually every operator out there today is sub-scale,” Ergen said during an Aug. 7 earnings call. “So if there is an opportunity for like-minded companies that have good cultural fits, then there’s opportunities for companies to get scale.”

The combination of Colorado-based EchoStar and London-based Inmarsat, which Inmarsat shot down for undervaluing the company in its eyes, would have combined EchoStar’s largely broadcast fleet of 17 owned and leased satellites with Inmarsat’s 13 satellites used for voice and data connectivity.

EchoStar’s most lucrative business today is its Hughes Network Systems division, which uses three EchoStar satellites and a growing number of leased payloads on other operator’s spacecraft to deliver broadband to customers in North and South America. Hughes generated $426.3 million for the months of April, May and June, a 17.5 percent increase over the same period last year. In contrast, EchoStar Satellite Services, which handles television broadcasts, including those of Dish Networks, and other services generated $95.4 million, shrinking by 3 percent from its 2017 revenues. Counting $4.2 million in small, ancillary sources of income, EchoStar’s revenue for the quarter increased 13 percent to $526 million.

Anders Johnson, president of EchoStar Satellite Services, said oversupply of Ku-band satellite capacity, along with the termination of Dish’s lease on the EchoStar-7 satellite and Dish’s reduction of four transponders on EchoStar-9 caused the division’s revenue loss. Johnson said he expects the business to continue to be challenged for the rest of the year.

British takeover laws forced the divulgence of EchoStar’s talks with Inmarsat, a regulatory snag that might have soured negotiations with Inmarsat prematurely, Ergen said.

“Normally we have those kinds of conversations in private,” he said. “If companies can find a way to put some assets together and work together, we typically like to do that in private. Many times companies have honest disagreements as to valuations, and so things don’t happen, but at least it’s not in the public eye. I think that was probably detrimental.”

Ergen said EchoStar will continue to pursue “inorganic” growth opportunities — something the company has the strength to do thanks to its reserve of $3.43 billion in cash, cash equivalents and current marketable investment securities.

“Inmarsat was one thing, but there are other opportunities out there,” he said.

Not every satellite operator agrees that television broadcasts are a waning market. Paris-based Eutelsat in particular has defended video as a strong base, saying that the slump in satellite television is concentrated in the U.S. where it is not a major player. But broadband is a growth market virtually every telecom satellite operator is after, either through high-throughput geostationary satellites or constellations of smaller, more numerous satellites in closer orbits.

Ergen listed the Internet of Things, consumer broadband and the satellite-enabled extension of mobile operator networks through cellular backhaul as three promising areas for future satellite services. Some of those have strengths in different orbits, he said.

For bandwidth-intensive backhaul services, “things like O3b make sense,” he said, referencing SES’s constellation of high-throughput, medium Earth orbit satellites. For smaller needs, higher up geostationary satellites are a good fit, he said.

Ergen said all satellites, but especially those in low and medium Earth orbit, have more favorable economics today thanks to lower launch costs. It’s now up to companies to figure out what works best from each orbit, he said.

“Are there platforms where those things can work together as opposed to separately?” he asked. “It’s pretty complex, but there are lots of opportunities out there for minding management teams who can think long term and take some risks.”

Other satellite operators have less to spend on acquisitions, or have more conservative shareholders, he said, making a thinly veiled reference to the shareholder-rejected merger of geostationary fleet operator Intelsat with low Earth orbit broadband startup OneWeb last year. Ergen mentioned limited geographic reach and the need to protect legacy customers as additional challenges for merger and acquisition activity among fixed satellite services providers.

“We don’t have those disadvantages at EchoStar,” he said.

Ergen said EchoStar still thinks fondly of Inmarsat, and believes Inmarsat would have benefited from Hughes technology. If possible, EchoStar and Inmarsat could still benefit from working together in ways outside of combining, he said.