After its annual results, with , SES was preparing not to celebrate its 40th anniversary in particular on Saturday, when the American activist fund Appaloosa sent a ‘missile’ to the board of directors and other shareholders: a letter between the annual results and the 40th anniversary proposing a vast reform of the rules around capital and governance.
The most dramatic of these is the conversation of existing class B shares [those held by the state] into class A shares at a conversion rate of 0.4:1, which would result in a single class of ordinary shares in which the government would retain a 16.67% stake, whereas today the state also holds 33.33% of the voting rights. “We believe the Lux[embourg] government’s legitimate interests in maintaining domicile, proportionate board representation and substantive operations in Luxembourg can be narrowly addressed through specific provisions added to the company’s articles of association or by contractual agreement,” the letter says.
Other measures include reducing the number of directors to nine, in strict compliance with the 16.67% stake of the Luxembourg government, abolishing staggered terms of office for annual re-election of all members and abolishing vice-chairmen.
But the most spectacular part is the proposals on shareholder return on investment. Appaloosa proposes “that the SES board adopt a policy of annually returning surplus capital, defined as the sum of opening excess cash and short-term investments plus operating cash flows and asset sale proceeds (including spectrum proceeds) generated during the year after allowing for: (1) debt repayments necessary to reduce the ratio of gross debt-to-Ebitda (excluding on-going transaction-related expenses) to a threshold of 3.75x; (2)capital investments necessary in the previous 12 months to maintain the company’s existing GEO satellite network; (3) the equity component of funds expended to complete the build-out of the company’s existing MEO network; and (4) the funds needed to complete the Intelsat stock purchase transaction pursuant to the share purchase agreement dated 30 April 2024.”
Behind these measures is the bleeding of the beast, in favour of shareholders, in the face of a business model that requires a long-term vision and investments adapted to this timeframe. SES would already be dead today, at barely 40 years of age, if the state had not been represented on the board. Perhaps even before its spectacular takeover of O3B Mpower, because former CEO Steve Collar had foreseen the evolution of the market. From a technological point of view, SES would not have had its satellites capable of providing ultra-high-speed connectivity in an almost infinitely reconfigurable mode--technology that enables it to offset losses linked to television with revenues linked to government activities, mobile activities and data. These are areas that will only grow in importance, and the crises are an excellent catalyst for these opportunities.
The activist fund--founded by the Miami-based American billionaire David Tepper, who is due to convert the fund into a family office shortly--does not mention any benefits for SES other than responding to an “existential threat” and "abandon[ing] an outdated status quo and forg[ing] a corporate culture that embraces commercial opportunity and eschews its history as a government ward.”
Worse still, he forgets to mention what happened to Intelsat, which enabled SES to buy out one of its competitors. Here’s the story.
Privatised in 2001 and floated on the stock exchange in 2013, Intelsat was in debt when funds began to take an interest in its future. The 2004 LBO, led by Apollo, Apax, Madison Dearborn and Permira, raised a few hundred million dollars and was topped up with debt, marking Intelsat’s entry into the private equity fold. Under their control, Intelsat undertook the major acquisition of Panamsat in 2006, which increased the group’s size but doubled its debt. As soon as the integration of Panamsat seemed to have been digested, the original funds sold their stake in 2007 to BC Partners (allied with Silver Lake), realising a significant capital gain.
BC Partners and Silver Lake held a majority stake in Intelsat from 2008 until its bankruptcy. The company took out new bond loans to pay shareholders (e.g., BC Partners financed its takeover by loading Intelsat with additional debt). These funds did not inject significant equity, even when Intelsat’s health was deteriorating--indeed, they held on to their shares at the 2013 IPO without selling, as the deal only served to pay down some debt. With almost €16bn in debt in 2013, Intelsat was virtually doomed to generate annual net losses despite positive Ebitda, which analysts recognised at the time.
In the late 2010s, bond and activist funds played a key role as Intelsat grappled with its abysmal debt. Tepper’s hedge fund Appaloosa Management, in particular, intervened twice. First, in 2017. Appaloosa--a holder of Intelsat bonds--led the charge against the debt restructuring plan conditional on Softbank’s investment. Softbank proposed to inject $1.7bn and merge Intelsat with Oneweb, provided 85% of bondholders agreed to a debt swap at a discount.
Tepper and others considered the offer insufficient for creditors and too favourable for existing shareholders (BC Partners) who hoped to retain a stake in the new entity. By rejecting the swap (less than 85% acceptance), these activist creditors caused the merger to fail in June 2017. While this position protected their short-term interests (refusal of an immediate loss on their claims), it prevented Intelsat from reducing its leverage at that time. Ironically, Appaloosa then became a shareholder in 2019 when a speculative opportunity arose: Intelsat saw its share price temporarily soar on hopes of monetising its C frequencies for 5G, and Tepper’s fund argued for maximising state compensation. In the end, however, the Federal Communications Commission decided to organise the sale of the C-band frequencies itself, leaving Intelsat with only a fixed amount of compensation (around $5bn) and not a free jackpot.
In 2020, during the bankruptcy proceedings, Appaloosa and a number of other bond funds (Pimco, etc.) formed a group of ‘crossover’ creditors who negotiated the restructuring plan. Tensions arose between groups of creditors--some accused the plan of favouring Appaloosa et al--and the residual shareholders vainly protested against their eviction. In the end, it was the bondholders led by funds (including Appaloosa) who took control of the restructured Intelsat in 2022, with around 96% of the capital, whilst the former shareholders (e.g., BC Partners/Silver Lake) were wiped out...
Was this proposal anything more than a ‘joke’? A discreet show of confidence, nonetheless. If the American giant is interested in the Luxembourg company, it’s because the lemon hasn’t been squeezed yet. This is certainly an invitation to think deeply about the governance of SES. Luxembourg has indeed set up the --and perhaps the world--in a three-way deal with Google, Luxconnect and Proximus; the minister delegate to the prime minister and minister in charge of media and communications (CSV) reiterated on Thursday at that sovereignty was a key issue; mobility minister (DP) did the same at our roundtable on the when it comes to air traffic control and the airport. But it’s hard to imagine Luxembourg giving up sovereignty over the skies--and, above all, connectivity from the skies--to a fund that has no development ambitions and no sympathy whatsoever for Luxembourg.
On 1 March 1985, SES was born in the face of the onslaught of communications giants Berlusconi, Kirch and Murdoch and the arrogant appetites of France. For €50m and a €124m credit line backed by a €150m state guarantee--equivalent to 2.5% of GDP or 7% of the state’s annual budget expenditure--Pierre Werner and Jacques Santer gave SES a spectacular boost that has now paid for itself in spades: €1.5bn in dividends, plus €176m at the time of the IPO in 1998 and €250m at the time of the capital reductions, a figure from which it is necessary to subtract €135m injected to avoid the state being diluted in the capital increases.
It’s a unique scaleup that has become a strategic challenge in the face of Elon Musk’s foreseeable blows. And there is no question of letting it down. There are also three American companies involved in providing connectivity from their smartphones, and one from Luxembourg (OQ Technology). No, the only serious option would be for the new CEO, Adel Al-Saleh, and the board to concoct a serious strategy. It remains to be seen who Appaloosa has managed to convince with their idea in this fragmented shareholder base behind the reference shareholders.
(For those who would like to revisit the fabulous history of SES, there is the publication by Paul Zimmer, one of those who first had to prepare the SES dossier. Zimmer has just published “Die Astra Story,” which is unfortunately only available in German at the moment. It’s published by Schortgen, ISBN 978-2-919792-79-5).
This article was originally published in .