SpeedCast (SDA) is a satellite-enabled communications services business. It provides fast, reliable internet connectivity in remote or otherwise challenging environments such as ships, oil rigs and isolated communities. We first wrote about SpeedCast in September, claiming that while it was an exciting business leveraged to rising internet penetration and data usage, it was still relatively immature. Operating in a fragmented industry, SpeedCast’s ultimate goal was to create a truly global network able to serve the largest and most complex customers. This week, the company took a huge step towards achieving that goal when it acquired its largest competitor, Harris CapRock (HCR) from Harris Corp (NYSE:HRS) for US$425 million (~A$550m).
Harris CapRock Overview
Figure 1. Harris CapRock Overview
Source: SpeedCast presentation
This acquisition truly is transformational, and not just because it will double the size of SpeedCast’s business. First, it diversifies SDA’s geographic exposure and strengthens previous areas of weakness in its network, particularly in the Americas where SDA has historically been sub-scale. It simultaneously bridges gaps in CapRock’s network as well, particularly in Asia and parts of Europe.
Geographic presence of SpeedCast and Harris CapRock
Figure 2. Geographic presence of SpeedCast and Harris CapRock
Source: SpeedCast presentation
As a result of its new superior network, SpeedCast will be catapult into a market leading position whilst simultaneously removing its largest competitor. SDA is now in a leading position to bid for all major global contracts in maritime, energy and emerging markets with a network and service level that is inimitable globally. This newfound stature within the industry will significantly increase its purchasing power in negotiations with satellite operators when leasing bandwidth capacity. Though SDA has already estimated it can generate ~$8m in network benefits over the next two years, in our view, this saving could be much greater over time, as contracts roll off and are renegotiated. Supporting this case is the current level of oversupply in the market with many satellite operators still holding excess capacity.
SpeedCast will fund its acquisition through an A$295 million capital raising, with existing shareholders entitled to two additional shares for every three shares currently owned (2-for-3 entitlement offer). An additional $365 million of debt will be utilised, $137 million of which will be directed to refinancing the company’s current debt position. Pro-forma net debt following the transaction will stand at ~$355 million, 3x pro-forma FY17 EBITDA. In other words, to complete the acquisition, SDA will materially increase its gearing which we feel increases the near term risk profile of the business. Moreover, it will simultaneously experience elevated execution risk as it looks to integrate a large, complex business with existing systems, processes and people.
Still, overall we believe this is an excellent strategic acquisition which expedites SDA’s journey to becoming a market leader and is transformational for the company. In Clime’s own portfolios, SDA is set to become a core holding as we take up our full entitlements through the capital raising. Under current assumptions, in line with management’s estimates, our 12-month forward valuation increases to around $4.60, though it could plausibly climb to $4.90 should operating conditions improve. Moreover, SDA’s cost synergy targets appear conservative which is to say nothing of the potential for revenue synergies, which are yet to be quantified. As a result, there may prove to be further upside to our SDA valuation.