We are long shares of Intelsat S.A. and SES S.A. Please click here to read full disclosures.
We will hold a conference call on Wednesday, June 26 at 1:00pm ET to discuss our views.
To participate in the conference call, dial 866-834-3313 (United States) or 409-981-0700 (international) and reference the Kerrisdale Capital call or conference ID 9798589.
We are long shares of Intelsat and SES, two large satellite operators with significant and underappreciated 5G spectrum assets. For us, this is an unusual position to be in. For years, with our reports on Globalstar (2014), Straight Path (2015) and DISH (2016), we have publicly railed against the excesses of spectrum hype. Time and again, we have argued, equity investors have gotten carried away with their enthusiasm about offbeat frequencies and futuristic technologies, ignoring inconvenient details and weak business cases. But this time, it’s different. Intelsat and SES hold the keys to the right frequencies, in the right way, at the right time, without the irreconcilable interference issues that have beset other spectrum stories. The value they stand to reap is staggering: ~$60 billion. Intelsat is worth $151 per share, and SES, €51.
The spectrum in question is called the C band. This set of frequencies, used by certain geostationary satellite systems operated in the U.S. almost entirely by Intelsat and SES, consists of two pieces: 3.7-4.2 GHz (for transmission from space to earth) and 5.925-6.425 GHz (for transmission from earth to space). The former band, 3.7-4.2 GHz, is now under consideration by the FCC for allocation to mobile use in addition to satellite use. Around the globe, spectrum in and around this range is emerging as the primary domain of 5G. With an ideal mix of ample bandwidth, good coverage (especially using the 5G technology known as massive MIMO), and international harmonization, the C band has been described as the spectral “sweet spot” for widespread 5G deployment. Whoever gets their hands on the spectrum first will immediately obtain a massive leg up on the competition.
Today, however, the C band isn’t just lying fallow: it’s a critical conduit between the creators of TV content, like Disney and Fox, and the distributors of TV content, like Comcast and DirecTV. To optimize the difficult transition from primarily satellite use to primarily mobile use, Intelsat and SES have proposed a clever and elegant solution: let the market decide. US C-band satellite operators, acting as a consortium, will effectively auction off portions of the band to mobile carriers like Verizon and AT&T; if the price is right, Intelsat, SES, and perhaps a few much smaller peers will roll up their sleeves and work with incumbent users to free up the spectrum. This market-based approach not only appeals to the FCC’s ideological bent; it’s also eminently practical, liberating meaningful amounts of bandwidth in a short period of time and helping the US win the so-called race to 5G. In our view, the Intelsat/SES proposal is by far the leading contender for C-band reform – a high-probability base case, not a longshot.
Based on recent international and domestic comps, we believe US C-band spectrum is worth at least $0.50/MHz-pop – valuing the entire band at roughly $75 billion. To seize an opportunity of this magnitude, Intelsat and SES would move heaven and earth. But they won’t have to. Based on realistic assumptions, we show that they can monetize roughly 400 MHz over 5-10 years, chiefly by rearranging channels across satellites and using up-to-date video encodings, all at a reasonable cost. It’s not rocket science, but shares in Intelsat and SES are set to launch.