Why consortium circling Inmarsat may wish to take it private

20 March 2019, 17:31 | Updated: 20 March 2019, 19:45

It's a wonder that the management at Inmarsat ever have any time to focus on their day job.

The satellite operator, a former member of the FTSE 100, has had no fewer than three takeover approaches during the last nine months and seems to spend much of its time being discussed as a target.

The first, in June last year, saw Inmarsat rebuff an approach from Echostar, the US satellite operator, on the grounds that it "very significantly undervalued" the company and its prospects.

The size of that approach was never disclosed, but Inmarsat's stock market value at the time was £2.2bn.

It briefly flushed out interest from Eutelsat, the French satellite operator, but that too came to nothing.

Now the company, which employs 1,500 people and which is based on the corner of London's Silicon Roundabout to the north of the City, is facing a third takeover approach.

This one comes from a consortium made up of the private equity firms Apax Partners and Warburg Pincus and two Canadian pension funds - the Canada Pension Plan Investment Board and the Ontario Teachers' Pension Plan Board.

The approach values the company at £2.5bn and news of it sent shares of Inmarsat up 57.5p to 495.3p - after they briefly hit 510p at one stage.

That share price movement gives an indication that shareholders are not getting too excited just now.

Inmarsat shares are valued in the approach at $7.21 (543p) each but, were investors convinced an offer was likely to materialise, they would surely be higher.

As things stand, with the two sides only at the discussion stage just now, they are trading at a significant discount to the proposed offer.

And, even after Wednesday's surge, the shares are only back to levels seen last October.

They touched 632p at the height of the excitement over Echostar's approach last June while the all-time high, at the end of 2015, was 1153p.

Things were a lot different for Inmarsat back then.

The company was riding high in the FTSE 100 (it departed the following June) and there was much excitement about the position it was building as the world's only global high-speed broadband operation.

Since then, some investors have fallen out of love with the stock, reflecting the loss of its monopoly in enabling global maritime distress signals.

The profitability of that division, which still generates half of Inmarsat's earnings, was also eroded by a downturn in global shipping activity.

Another threat to profits emerged when it became clear payments to Inmarsat from Ligado, a US satellite operator that leased spectrum from the UK company, were set to dry up.

Competition in satellite broadband, meanwhile, is intensifying not only from long-standing rivals such as California-based Viasat but also from the likes of OneWeb, which is backed by Sir Richard Branson and by Softbank, the deep-pocketed Japanese investment firm.

Adding to those concerns among investors was a dawning realisation that Inmarsat faced big investment costs during coming years as it builds a network providing in-flight broadband connectivity to the world's airlines.

Those costs were reiterated when, in March last year, Inmarsat announced a big drop in profits and a cut in its dividend.

The Echostar approach followed and, although it was rebuffed, Echostar has gone on to build a 3% stake in Inmarsat, making it the company's 11th-biggest shareholder, while also snapping up some of its bonds. It will be watching with interest here.

There is reason to think, though, that the consortium, which has until 16 April to table a firm offer, may get further than Echostar did.

For a start, there is the fact that Apax previously owned Inmarsat after buying it, for £900m, in October 2003 in partnership with Permira, another private equity firm.

The pair went on to float Inmarsat on the stock market in June 2005 - when it was valued at £1.2bn - but retained a stake for some time after that.

Moreover, the consortium is offering cash, whereas Echostar's offer last year was partly in its own shares.

Meanwhile, Andy Sukawaty, Inmarsat's non-executive chairman and its former chief executive, is a former adviser to both Apax and Warburg Pincus, suggesting negotiations may be more cordial than those which took place last year.

The drift in Inmarsat's share price since it saw off Echostar last year may also mean some shareholders are more comfortable about accepting an offer that is probably more valuable than the sum the Americans offered last summer.

This is a business that, while having excellent long-term prospects, faces a number of challenges in the short term and which may therefore be better off in private hands.

Yet, should it be taken private, there will also be a sense of disappointment.

This is a unique company and Inmarsat's stock market investors will not easily be able to obtain exposure to anything similar if it goes.