VSAT - Viasat: A Big Launch

Summary

• Viasat has seen a hugely accretive divestment in anticipation of the Inmarsat deal.
• This divestment looks nice, but the Inmarsat uncertainty still creates quite an overhang.
• Despite this nice recent deal, well reflected in the share price, I am cautious here amidst a very mediocre long-term track record.

I have not covered Viasat ( VSAT ) yet on this platform, but as it announced a big deal in recent times, I have taken a small interest to see what the implications are, as the sale involves just a portion of the business at a relatively large price tag.

Connecting The World

The header above is the mission of Viasat. Founded in 1986, the global communication business has a strong history as it serves clients across three segments. Government systems and satellite services each make up roughly 40% of sales, including services like encryption, data links, in-flight connectivity, broadband etc. These two segments are complemented by a third and smaller commercial networks business.

This composition of segments is important. The star of the company is the satellite systems business which posts segment EBITDA of $429 million on $1.2 billion in sales, largely derived from commercial airlines. Government systems make up $1.1 billion in sales on which still a solid $281 million EBITDA number is posted. The commercial networks business, serving defense and aerospace names, is the troubled child. In the fiscal year 2022, the segment posted $512 million in sales on which it posted a negative $99 million EBITDA number.

While a $611 million EBITDA number on nearly $2.8 billion in sales looks solid, full-year adjusted earnings only came in at $88 million, with a GAAP loss posted at $15 million. The company ended its fiscal year 2022, which ended in March of this fiscal year, with $2.2 billion in net debt. The 75 million shares of the company now trade at $40 per share, for a $3.0 billion equity valuation, or $5.2 billion enterprise valuation.

Arguably, this looks like a reasonable EBITDA multiple, yet the issue is that earnings are very limited, as the company is hurt, of course, by the fact that it has been owning a lossmaking business as well.

This is still a bit too simplistic as Viasat announced late in 2021 that it would like to acquire Inmarsat in a deal valued at $7.3 billion, essentially comprised of a $4.2 billion cash component and debt assumption, and the issuance of 46 million new shares, nowadays supporting a lower valuation. Needless, to say, this was more the case of a reverse merger, with Inmarsat being quite a bit bigger than Viasat, at least in terms of its valuation, not the actual sales.

This is part of the reason why shares fell to $55, down quite a bit in November of last year on the back of the deal announcement.

There is quite some overhang, as the deal is only set to close in this calendar year. Other than a high valuation and substantial net debt load, it would be wise for Viasat to address leverage a bit in this environment given the increased uncertainty out there.

What Happened?

Since early summer, Viasat has posted modest first quarter results with revenues up 2% to $678 million, yet profitability metrics were down quite a bit. First quarter adjusted EBITDA was down 17% to $132 million, as adjusted earnings fell two-thirds to $11 million, with GAAP losses of $22 million showing up. Net debt rose to $2.4 billion ahead of the merger, clearly a big issue. Despite the softer quarter, Viasat guided for double-digit revenue growth in sales and EBITDA improvements, even after a softer first quarter.

In October, Viasat announced a surprise move, something which pleased investors. Shares basically rose from $30 to $40 overnight, adding three quarters of a billion to the value of the equity after the company reached a deal to sell 16 Tactical Data Links to L3Harris Technologies (LHX) in a $1.96 billion deal. After taxes and transaction fees, net proceeds are pegged at $1.8 billion.

The unit is part of the government system business and generated $400 million in sales and $125 million in EBITDA, suggesting that the company net fetches a 4.5 times sales multiple and nearly 15 times EBITDA multiple for the business. Note that the entire business of Viasat is valued at around 2 times sales at $40 per share, and at a high single digit EBITDA multiple, clearly showing that this is quite accretive to the overall valuation.

Moreover, net debt will be largely eliminated ahead of the Inmarsat deal. This looks interesting, as the pro forma business will shrink from $2.7 billion to $2.3 billion in sales, and EBITDA of $611 million will fall to just below the half a billion mark. The $5.5 billion enterprise valuation (at $40 per share) will drop to $3.6 billion, as the reduced expectations look interesting.

What Now?

A much leveraged business making a sale that takes place at a very interesting multiple looks very interesting, and hence I understand the knee-jerk reaction by the market, sending shares higher by a third in just two trading sessions. The issue is that the pro forma picture following the Inmarsat deal looks quite uncertain. Even at these low levels, Inmarsat comes in at a $6 billion valuation, far exceeding the current $3.6 billion valuation of Viasat, all while Inmarsat is far smaller in terms of operations.

That is the problem. While the current deal looks hugely accretive from the point of view of the standalone firm, the company is still working on a much larger deal that will give the company many strategic advantages, but it all has to play out and leverage will still be substantial. Amidst all of this, and the fact that sustainable earnings are hard to come by, I feel that much of the valuation support is driven by the special operations. Perhaps a satellite player is always interesting for perhaps a non-money motivated buyer.

Hence, I find a path to see sustainable value creating still hard to find, more or less confirmed by the fact that investors have seen no capital gains over the past decade, as I am taking a cautious stance here as well, even as the latest divestment looks quite solid.

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