Still Short Intelsat - A Grab Bag Of Bear Arguments

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About: Intelsat S.A. (I), Includes: SGBAF
by: David Orr
Summary

Lawmakers on both sides of the aisle oppose the CBA proposal. Concerns range from taxes, security issues and competition.

Ericcson, designer of 5g hardware, still opposes the plan on technical grounds.

A Bloomberg article revealed that SES S.A. spent just $100k lobbying the US government last year, strong evidence that they don't expect to receive a multi-billion dollar windfall.

Intelsat's underlying business deteriorated faster than expected. Plus, they recently lost $400m due to a satellite anomaly.

T-Mobile lawyers demonstrate that the FCC indeed has the authority to kick Intelsat off the spectrum without consent.

The Intelsat debate is whether or not the company can sell spectrum it currently uses, creating large windfall profits. I will do a one sided analysis because Kerrisdale is already providing good coverage for the bull case. My main argument is that Intelsat does not actually own this spectrum. Rather, it was awarded for free to satellite companies on a first come, first serve basis. Because of this, the spectrum rights are still a US tax payer owned asset. The tax payer should receive the bulk of the profits rather than foreign satellite companies. Without a windfall greater than ~$6b, Intelsat common stock is likely worthless.

1. Lawmakers oppose the CBA

"Why wouldn't we auction the spectrum that is licensed by the taxpayers and use the estimated $40 billion in proceeds to expand rural broadband in places like Alaska that need it, and of course, other states represented on this panel," Sen. Dan Sullivan (R-Alaska) said. ...

"I think we have to ask ourselves: why should the FCC allow a group of foreign satellite providers to walk away with potentially tens of billions of dollars that could be used to solve our own country's broadband needs?" Rep. Mike Doyle (D-Pa.)

A while later John Kennedy wrote a letter to FCC chairman Ajit Pai expressing similar concerns.

I believe it is critical that the process for allocating C-band spectrum for 5G must be fair, open, and transparent. I remain concerned that the proposal made by a consortium of foreign-owned satellite providers known as the C-Band Alliance (CBA) meets none of these requirements.

2. Ericcson opposes the CBA

Ericcson wrote letters to the FCC letting them know that the CBA proposal 1. Probably isn't as fast as Intelsat claims, 2. Might not even work properly and 3. Doesn't clear enough spectrum. The third point is the most important, in my mind,

Last year, Ericsson pointed out (PDF) that the CBA proposal of 180 megahertz for flexible use spectrum (i.e., 200 megahertz, less a 20 megahertz guard band) was far less than what's necessary to sustain a robust 5G service.

Does winning the 5g race mean 1. Possibly getting it a little bit faster or 2. Having cheaper service and faster speed for decades? A strong point here is that Ericcson is one of the few parties that doesn't have a horse in the race. They want the outcome that works best with the hardware, or what is best for the US 5g consumer. Why? Because the better/cheaper 5g is, the more products they sell. Surely the folks at the FCC are smart enough to realize this. That said, I still think it is quite possible the band is shared - this is not the main point of this article. Just that it is still possible that more spectrum will be cleared.

3. SES S.A. lobbying budget conflicts with windfall narrative

The Bloomberg article provides this chart, On one hand, SES S.A. going to receive $10b+ according to the bulls. On the other, the company spent just $100k trying to realize that pipe dream. This is a serious hole in the bull narrative. More believable is that Intelsat is on a desperation fueled, poorly funded mission while SES S.A. would rather put their money to better use altogether.

4. Intelsat's business is performing badly.

Net losses almost doubled in the last year, faster than I expected in my previous article. On top of that, the recent satellite loss will cost the company ~$400m or about $60 million in lost revenues according to the latest conference call. There isn't insurance,

Source: Intelsat Annual Report

5. T-Mobile lawyers point out that the FCC can force Intelsat to vacate

T-Mobile probably spent more on thorough legal research than all of Intelsat's lobbying budget. Key points,

"Section 316 grants the Commission broad power to modify licenses; the Commission need only find that the proposed modification serves the public interest, convenience and necessity."...

Not only has the Commission used its Section 316 authority to modify licenses on an individual basis, but it has also exercised that authority to modify licenses on a service-wide basis. ...

that "the FCC may modify entire classes of licenses."

...

While Section 316 of the Act and Section 1.87 of the Commission's rules implementing Section 316 provide licensees the opportunity to object to a proposed modification,14/ both the Commission and courts have recognized that license modifications need not be consensual.

...The Commission, however, rejected compensating Sprint on a "megahertz-for-megahertz" basis.

They give many specific examples. Based on this, the FCC randomly giving away the spectrum seems very unlikely and would raise a lot of questions.

6. A mostly-Koch backed website popped up opposing the CBA

A group of 13 paid lobbying groups created a website called Cband Facts that opposes the CBA. I went through these one by one to see who funded the different groups. Most were Koch, a couple were unknown and a couple were Charter. This is in addition to Google and other larger players who oppose the CBA. The point is that serious money is opposing the CBA - compare this to Intelsat's lobbying budget. In fact, besides parties with an obvious conflict of interest, nobody seems to support the CBA proposal except for one FCC commissioner. Even then, he hasn't said that he supports giving away tens of billions in tax payer money. That seems like 1. The wrong choice and 2. Career suicide.

7. Valuation

Currently, Intelsat loses ~$400m/year. The satellite anomaly increases that to $460m/year. Considering the trend in earnings, I'll conservatively bump that up to ~$500m/year loss going forward.

The company's $14b in long term debt carries interest expense of about $1.2b. If the long term debt were reduced by $7b, interest expense would be chopped in half. In reality it would drop more but for simplicity's sake just cancel that with present value considerations since the CBA proposal would take a while.

This would leave a company earning a ~$100m/year with questionable management in a declining industry. What is that worth? At 10 times earnings that'd be $1.25b, a price target of about $9. A $5b windfall (after expenses) implies a share price of $0. Anything above $7b would about add dollar for dollar to the market cap.

Intelsat's Windfall Amount Intelsat Share Price
$5b $0
$7b $9
$20b $100

The bulls don't think Intelsat will receive the entire windfall anymore. The government will collect at least some tax. With a 30% tax the windfall amount goes down to $14b, or a price target of about $50.

Importantly, Intelsat only controls about half the spectrum. If they receive a $7b windfall that means the US government is giving away $14 billion dollars collectively to satellite companies. Does that actually pass your smell test? It doesn't for me so my price target is zero. The bull case here is that the US government is going to give away the entire spectrum worth as much as $40 billion after expenses. I think that is crazy but I guess we're all wrong sometimes. Another idea is that bulls can switch to SES S.A., a company that has an underlying business that won't go to zero without a massive windfall. The risk:reward seems much better. I've considered doing a long/short strategy as well but I am rather confident here. The catalyst here is obvious: The government makes a decision. When exactly is hard to predict. One risk is that the price spikes on the CBA proposal being accepted despite the government taxing away the windfall. If that happens, don't close the position immediately. Be disciplined and wait for the details. I think that is a very real possibility. On the other hand, if the price collapses hard because Intelsat gets a clear bad outcome, be ready to short more since the price probably won't collapse hard/fast enough. The time to quit the short will be if Intelsat clearly receives more than ~$9b at current share price.

Disclosure: I am/we are short I. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Thanks to surfsup40 on stocktwits for the coverage.