Global Eagle Entertainment
Price Target: $22
(in millions, except per share amounts)
Avg Volume ($MM)
Short Interest %
Price Target: $22
Global Eagle Entertainment Inc. provides in-flight video content, e-commerce, and information services for airlines worldwide. The company offers satellite-based broadband services, including Internet access, live television, shopping, and flight and destination information for airline passengers. Its Advanced Inflight Alliance business provides content services, such as movies and television programing, audio, games, applications, and creative solutions. Global Eagle Entertainment Inc. is headquartered in Los Angeles, California. Global Eagle is a combination of Row 44, AIA, and recently acquired PMG. They currently have 500 planes on-boarded at this point. Global Eagle owns 10% market share, in a market that is estimated to be as large as $3B.
Southwest, Norwegian Air, along with Russian and Iceland airline.
A Former SPAC, Ready to Soar!
Global Eagle Acquisition Corp, started as a SPAC (special purpose acquisition corp) in 2012, and is now transformed into Global Eagle Entertainment (ENT). ENT is very active with International sales, focusing on Europe and Asia, which has considerably less competition than the US. GOGO has Delta/American/United locked up in contracts in the US, so ENT believes they have bigger and better opportunities abroad, especially with AIA being a German company with existing international clients. The number of airplanes with internet internationally is significantly less than the US. The US market accounts for only 30% of all air travel.
AIA and PMG have the rights to content and create some of their own content with games, along with 14 channels of live TV, which is soon to be 20 channels.
As a whole, ENT brings connectivity to the plane, with live TV, stored content, and games. Currently AIA is the bigger piece of their business, but PMG did about 4.5M in EBITDA in 2012. Row 44 has focused on connectivity in planes, which is a lower margin business, but management feels a transition is coming into more content in 2013/2014, which is why EBITDA could ramp so quickly. AIA produced 2012 EBITDA of roughly $15M, while Row 44 was somewhere around -$17M.
Contracts are typically 7-10 years, with Southwest's running thru 2020. The only real way out is if they have serious service issues. Airlines are very slow to move, and once the equipment is in there and installed, it stays. GOGO has been in the market for a few years longer and some of their contracts could be coming due in the next couple of years, which could present an opportunity to steal business, as ENT's technology is superior.
ENT announced a deal with Southwest/Dish TV under TV flies free on July 1, 2013. Details are becoming more known, but still not 100% clear on what it will generate in revenue per year, but Row44 management has stated that this will be a "game changer". Southwest pays ENT on a revenue share per passenger, and now that TV will be offered free on the majority of Southwest airlines, revenue will ramp considerably, along with EBITDA. For reference, Southwest have 47k passengers per quarter, and offer WiFi on 75% of their planes. Southwest charges customers $5 for WiFi, while GOGO is considerably more expensive at greater than $15 per flight. To add more fuel to this story, ENT has been approached by other airlines (currently with GOGO) about setting up a similar deal to TV flies free. Airlines can break their contract if another company has superior technology and pay a minimal penalty. But to be conservative, I have not even calculated the potential upside from GOGO contracted planes switching to ENT technology. Note that under the Dish flies free deal, ENT is still pumping their content through devices, just with a Dish commercial for their new DVR.
I believe ENT is currently in the process of setting up advertisement deals with a streaming music player (i.e. Pandora, Spotify, etc), a text messaging deal (i.e. Verizon, Sprint, AT&T, etc), and an e-commerce deal (i.e. Amazon). I have no information on which companies will ultimately sponsor these deals, but the company's listed above are purely speculation. Each of these deals will ultimately lead to more revenue, but still unquantifiable.
China Satellite Deal
On the heels of this advertising announcement, ENT also struck a deal with China Telecom Satellite Communications to provide in-flight connectivity to Chinese carriers. The deal also would include non-Chinese carriers operating in China. China is the largest untapped in-flight connectivity market in the world, and home to some of the world's largest airline companies. ENT has stated they are focused on the international markets, mainly Asia. If they were able to strike a deal with a large Chinese airline, these would prove very positive for the story.
Cruise Line Industry Deal
No one is talking about GOGO or ENT striking a deal with a major cruise line company, but I think one could be in the making. I have no idea on timing, but ENT has acquired quite a bit of content that is already being provided to cruise liners, providing a foot in the door for wi-fi in the ocean. To me this makes sense, if you have been on a cruise recently, the internet is slow and spotty, not to mention they charge outrageous fees. With ENT's current technology they could provide this to the cruise liners, where GOGO could not currently offer this technology. I am not sure what sort of revenue this would add, but it would be an incremental positive to the story. Timing is also uncertain, but I know they are aggressive and out there beating the streets currently.
-Under the radar
-Revenue sharing still unknown
-Potential buy-out candidate
-Upcoming earnings call could see Mgmt lay out potential
SPAC's are typically under the radar, with little trading history and the consensus view of sketchy pasts. Typically company's not widely followed by wall street or in the main stream eye, are often forgotten, which can create inefficiency in the valuation of securities. While most investors shun SPAC's, I look at the entire space of special situation plays because you never know where you will find value. While the consensus view may hold some water, ENT does not fall under that category. PAR Capital is a $4B hedge fund and is the largest holder of ENT, with Ed Shapiro as Chairman of ENT, who is a main partner at PAR. PAR has been an avid investor in the airline industry across the entire chain, and they know the space well. Ed is very involved with ENT and taking a hands on approach with this particular investment. This is odd, but bullish in my opinion. It is not often you see non-activist hedge fund managers taking chairman roles and playing a major role in the direction of the company.
GOGO and Panasonic are two large players that could potentially buy ENT. I am unsure of the probability, but enough of a chance that warrants a brief discussion. GOGO does not have Ku-Band, but they are in the process of trying to get FAA approval and get up and running, however, ENT already has the technology approved and in the air, SO why doesn't GOGO buy the technology they thrive for… Panasonic is a large player in the device industry for airliners, but have developed Ku-Band WiFi and participate in the international space. It would make some strategic sense to buy ENT, in order to gain larger scale, but have plenty of capital and name recognition already in place.
2013: $20M (Row 44- flat for 2013, AIA- did $15M in 2012, and PMG- did $4.5M in 2012)
The EBITDA estimates are ramping as margins expand. The hardware side of the business is essentially done at cost, so not much profit from that segment, but their Content side is high margin business and as that becomes a bigger piece, margins will expand, causing a wicked high growth rate.
I have projected EBITDA to be roughly $100M in 2015 and applied a 12x EV/EBITDA multiple, plus the addition of $87m in net cash, with roughly 60m in diluted shares outstanding, in order to derive a target price of $22 per share. GOGO trades at roughly 20x EV/EBITDA with inferior technology, so I feel 12x EBITDA for a company growing rapidly, with increasing EBITDA margins seems conservative. Free Cash flow should go positive at the latest by 2015, but expect marginal positive FCF in 2014, as CAPEX is a lowly $10M a year. They can keep CAPEX low because the airline pays for the antenna/technology to be equipped to each plane. NOTE: The share count is a bit confusing because of the potential earn out by management.
Competition is very high, but ENT does have first mover advantage on satellite based connectivity, and unlike cell towers (~GOGO) their technology can be used over water. Not to mention ENT has high speed broadband, which allows the user to access the internet at higher speeds and potentially more usability. GOGO is developing a satellite based technology, but ENT does not believe they can have a ready product for 1-2 years at least, giving ENT a long lead time to lock in customers. On the international side, Panasonic is the biggest threat, as they are currently testing some Ku-Band broadband on airlines, plus they have the advantage of providing most of the devices you seen on airlines, such as screens, TV's in headrest, etc. OnAir and LiveTV are 2 other competitors, but according to management ENT still have the most broadband and the others are low quality. While JetBlue's LiveTV is currently a competitor, I believe that ENT will acquire LiveTV, and is the sole reason they did a secondary offering.
While my EBITDA goals seem lofty, I do not believe they are the biggest piece to the story, meaning if they do not hit my stated estimates the stock should act fine. This is an early stage idea and story, which is predicated on ENT winning airlines over, in order to put WiFi on the plane and pump their content through consumer's devices. I think my estimates are reasonable, but will have limited impact on the direction of the stock price in the near term. Longer term, fundamentals will matter and the stock will sell off if they continue to miss estimates.
Competition is risk number one, not signing deals is risk number two, and missing estimates would be risk number three. But again with under the radar stocks, comes a smaller following from Wall Street, causing consensus estimates to vary widely. ENT needs to show viability and expansion into the international market. If they do not sign any new airlines in 2014, that would be a major negative to the story. Management is upbeat and pounding the street for deals, so it won't be for a lack of effort on their end!
2013 is the inflection point where they go from losing money to making money, with a ramp up in EBITDA coming in 2014. The growth is huge, and margins will continue to expand as they focus more on content provided to the airlines. This is an under the radar play, with your main risk being competition and ability to ramp quickly. I think both of those risks are real, but ENT will be rewarded as first mover.
The opinions expressed in this article are those of the author as of the date the article was published. These opinions have not been updated or supplemented and may not reflect the author's views today. The information provided in the article does not provide information reasonably sufficient upon which to base an investment decision and should not be considered a recommendation to purchase or sell any particular stock or other investment.