The final frontier.
These are the voyages of the…
OK, OK, never mind, back to your cubicle now.
You’ll never make it into outer space if you go into a standard investment banking role, but you might come close if you join the space & satellite advisory group.
Even if you don’t win free tickets for a Jupiter-bound shuttle, there are plenty of other benefits:
- You get to see plenty of creative business plans – asteroid mining, moon landings, and whatever Elon Musk’s next idea is.
- You’ll gain experience working on large M&A deals and financings, even if you’re at a smaller firm.
- If you want to try something different, you could always move into related areas like telecom, aerospace, or industrials coverage.
- And yes, maybe one day you’ll get invited to a closing dinner on Mars.
Let’s jump into orbit:
3, 2, 1, Liftoff…
Q: So were you always interested in outer space, or did someone else put you in this group?
A: Hah, a bit of both.
I’m from Canada, and I studied electrical engineering there before doing my Master’s degree in Management (Operations Research) – sort of like an MBA, but more quantitative.
I wanted to get into consulting, but my school was completely off consulting firms’ radar. I did get interviews, but none of them were through the school.
So I took an internship at a local firm in the satellite industry, and then I attended International Space University, where you learn all about the industry over the course of a few months (I did this out of personal interest).
I learned about the business side of space there, and got a lot more interested in finance – it seemed like a more exciting career than consulting.
While there are finance opportunities in Canada, the NY market is significantly bigger so I decided to move there to look for jobs (about 6 years ago).
When I first arrived, I did an unpaid internship at a small institutional brokerage firm for ~2 months.
At that stage, I just wanted some type of finance work experience on my resume so I could apply to other roles – namely, anything related to the space / satellite / telecom industries.
I learned of one boutique firm that specialized in satellite and telecom, so I called them when I was in NY, eventually saw a job posting, and then responded and went through a rigorous recruiting process.
Q: So what did this rigorous process consist of? I am assuming no moon landings were required…
A: It was a very small firm – around 6 people at the time – so I met with everyone there multiple times. They wanted to avoid hiring mistakes no matter how much time and money it cost them, so “cultural fit” was critical.
They asked the standard finance / technical questions, industry/market questions, and so on, but they also gave me 2 modeling tests and a writing test – even as an entry-level hire.
It wasn’t anything too complicated (think: “Build a simple 3-statement model for this company using these assumptions”), but my modeling skills were not spectacular at the time.
My writing, however, set me apart and that’s why I ultimately won the offer.
A lot of other applicants were Excel wizards, but they couldn’t express their thoughts coherently in written form.
The Space and Satellite Industry: All the Quadrants of the Asteroid Field
Q: Yeah, being able to write coherently gives you a big advantage over the “rocket scientists.”
So how is the industry divided? And why do some firms specialize in space / satellite?
A: The two main areas are the satellite side, which is more related to telecom, and the aerospace side, which is more related to… aerospace.
The satellite side is more about communications, networks, and content delivery to subscribers and customers; the aerospace side is more about building satellites, components for satellites, launch vehicles, and ground control systems.
Satellite Imaging, which is about taking and analyzing pictures of the Earth, is a smaller area but you could count that as a third sub-sector.
Finally, there are “space transportation companies” such as SpaceX – this is a brand new but rapidly growing area.
They make space transportation more widely available, reduce costs, and… attempt to colonize Mars.
Q: All of this sounds very capital intensive – I assume that’s what draws banks to the space?
Deals tend to be relatively large (high hundreds of millions to billions of USD) because a huge amount of capital is required to finance new satellites, space shuttles, and the systems behind everything.
The Founder of my former boutique firm, for example, worked at a bulge bracket bank originally, started a group there that focused on commercial satellites and space, and brought in so much business that he went off on his own.
Q: So the bulge bracket banks tend to dominate deals in this industry?
A: I wouldn’t say that. On the financing side, yes, but the M&A advisory side is more mixed.
At most large banks, satellite coverage is a part of the telecom group; large banks are less active in the space part of the aerospace sub-sector since they spend more time on somewhat bigger deals in the commercial aviation and government contractor markets.
With satellites, MS, JPM, GS, CS, Barclays, and Raymond James all have a solid presence.
In aerospace, you’ll also see the large banks, plus middle-market firms like HLHZ, Jefferies, and Imperial Capital. Moelis also has a presence in aerospace.
And then there are all the boutique advisory firms you’d expect, ranging from the “elite” boutiques (Moelis) down to 1-2 person firms.
Q: Thanks for explaining that.
Jumping back to how the sector is divided, what are the key drivers and macro indicators?
A: Depends on the sub-sector… if you’re looking at, say, direct broad broadcast satellites and direct to home satellites (e.g., DirecTV), they’re all based on a subscription model.
They provide content, and you sign up and pay a monthly fee… and they keep increasing the price and the subscriber count to grow.
So the key metrics are the Average Revenue per User (ARPU), cost per subscriber, subscriber growth rate, and churn rate.
Fixed satellite operators provide “telecom infrastructure services” and operate satellites that other companies lease transponders from.
These transponders are then used by broadcasters, large enterprises or governments, ships at sea, or even planes that provide Wi-Fi.
Example companies include SES, Intelsat, Eutelsat, and Telesat.
It’s similar to commercial real estate since they pay for the satellite construction upfront and then lease the transponders on a yearly basis – just like how real estate developers construct buildings and then lease them out to tenants on yearly contracts.
You look at metrics like fill rates, transponder leasing rates, capital costs, life of the satellite, and underlying demand for these services in ships and planes.
One area that’s somewhat different is imaging satellites – they take photographs of the Earth and then sell their library of images, either for a one-time fee (for a “snapshot”) or on a subscription basis (for a library with ongoing updates).
The aerospace side is completely different because the business is dominated by government contracts and large-scale procurements – so it’s “lumpier” and contracts take a very, very long time to negotiate and close.
Key drivers include the government’s budget and the need to replace existing infrastructure.
Q: Great, but you’re forgetting about space transportation.
A: Yeah, parts of that are relatively new, though some elements have been around for a while.
The older part is the business of launching satellites. Generally, these companies require an upfront deposit or a series of payments to participate in their launch.
SpaceX is a relatively new entrant in this field, and they’re doing a lot to disrupt it.
Another new area is the space tourism companies, like Virgin Galactic or XCOR.
They haven’t officially started operating as of the time of this article, but when they do, they’ll be almost like cruise lines selling vacations and then planning their trip schedules based on sign-up rates.
Then there are companies that sell the use of “space facilities,” as well as firms that offer asteroid mining, which many billionaires have been getting into.
How to Value Your Own Rocket Ship
Q: So what are valuation and financial modeling like in this sector?
It sounds… different.
A: Yeah, but ironically the valuation side isn’t much different.
Many fixed satellite operators have high EBITDA figures because CapEx is high but OpEx is low – so that can skew things if you rely solely on EV / EBITDA multiples.
For telecom-related companies, the subscriber count, subscriber growth, and churn rate are all very important, so we might look at EV / Subscriber-type multiples.
Q: What about the DCF?
A: You can run a DCF as well, but you have to be careful with CapEx and D&A assumptions since satellites can sometimes last for 15 years!
So you might build a 15-20 year DCF, and then assume that CapEx spending does NOT follow a predictable trend since satellite construction tends to be “lumpy.”
Terminal Value is tricky since satellites need to be replaced, but the exact timing is hard to predict.
So you may end up in situations where the NPV of the Terminal Value represents a somewhat lower percentage of the company’s total implied value.
Wheeling, Dealing, and Moonwalking
Q: And what are the most common deal types?
A: My firm didn’t participate in the capital markets side, but most bulge brackets do quite a few capital markets deals.
Sometimes we’d get an assignment in conjunction with one of those; other times, we did a lot of middle-market M&A work and small private placements for newer, growing companies.
Q: So what motivates M&A in the sector?
A: A few factors are unique to the space and satellite sector, while others come up across all industries:
1. Scale – Because of the expense structure, it’s almost always better to operate, say, 10 satellites rather than 1-2.
The ground infrastructure and operating expenses may be slightly more expensive with 10 satellites, but it won’t cost 10x as much to operate.
There are other benefits as well – for example, a company with more satellites will have less “lumpy” procurement costs and its CapEx will be easier to forecast, so that can make it easier to raise equity/debt financing.
As a result, a lot of smaller operators with only a few satellites join together to gain greater scale.
2. Geographic Coverage – A single satellite can cover, at most, 1/3 of the Earth at any given time.
So if a company wants to service Europe, Asia, and the Americas, it needs to operate multiple satellites.
A lot of broadcasters also like having broader coverage – for example, if they’ve signed up for a satellite transponder in one part of the world, being able to work with the same operator to contract another transponder in another part of the world is a bonus for them.
So many operators join together to enhance their regional coverage, or to expand into new regions altogether.
3. Spectrum Assets – These are always important in telecom, but they’re even more important with satellites because spectrum licenses limit companies’ rights to broadcast into certain countries and regions.
There have been multi-billion dollar battles over spectrum rights in parts of the world, so bidding on the rights themselves isn’t always the best approach.
Even if a company doesn’t have great satellite coverage, it might become an attractive acquisition target if it has desirable spectrum licenses.
How to Enter the Space Academy (and Graduate)
Q: Very interesting. Do you have any example pitch books or presentations from the sector, or other recommended resources?
If you want examples of documents that banks create, take a look at:
- Sample CIM for ICO Global Communications (now Pendrell Corporation)
- Intelsat – Prospectus for Floating Rate Senior Notes
- Intelsat – IPO Prospectus
And then if you want to see a few merger announcements and company presentations, check out:
- AT&T / DirecTV Merger Presentation
- Orbital / ATK Merger Presentation
- Sirius / XM Merger Presentation
- GeoEye / DigitalGlobe Merger Presentation
- Eutelsat / SATMEX Deal Press Release
- MDA / Space Systems/Loral Merger Presentation
Q: Great. And what are the most common paths after joining this group?
It seems very niche, so can you actually move into other industry coverage teams?
A: It is a niche area, but there are more opportunities than you’? think.
Some people do leave and move into private equity; a lot of satellite financings involve high-yield debt, so you gain a relevant skill set if you work on those deals.
You’ll also see people move to credit funds, credit advisory funds, and Leveraged Finance for the same reason.
And, of course, some people do stay in this industry for the long-term. It has changed quite a bit and become more dynamic because of companies like SpaceX.
Even bigger companies in the field are taking a more serious look at “creative” ideas like space tourism.
Q: And what are your own plans?
A: As I mentioned, I worked at the boutique advisory firm for a few years and recently left.
I’m looking at a few different options, from joining a newer space / satellite start-up to joining a larger bank to starting my own fund or partnering with others to start investing in the sector.
The best part of this industry, by far, is getting to see everyone’s business plans.
You see some really exciting ideas, from space stations to moon landings to asteroid mining missions – quite a bit different from your average business plan in the consumer retail group.
And that’s what keeps me interested in the sector, even after years of working in it.
Q: Awesome. Thanks for your time!
A: My pleasure.