Eutelsat, OneWeb to merge in LEO/GEO push

The next generation of the OneWeb constellation is now funded. Eutelsat will divert its dividend payments for the next two years to help cover the cost of building and launching the expanded low earth orbit constellation as part of a merger deal between the two companies announced on Tuesday.

Bringing together our two businesses will deliver a global first, combining LEO constellations and GEO assets to seize the significant growth opportunity in Connectivity, and deliver to our customers solutions to their needs across an even wider range of applications. This combination will accelerate the commercialization of OneWeb’s fleet, while enhancing the attractiveness of Eutelsat’s growth profile.

– Dominique D’Hinnin, Eutelsat’s Chairman

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The companies estimate average annual revenue synergies around €150m after four years. Much of this revenue boost is expected to come from a premium customer proposition of delivering a blended LEO and GEO offering.

This raises, once again, the question of whether LEO broadband services can drive sufficient demand to justify the cost of developing and deploying the constellations. OneWeb CEO Neil Masterson noted during an investor briefing call that “Customers all want this interoperability and combined offering, which will be highly differentiated in the market.” Eutelsat CEO Eva Berneke echoed that sentiment, suggesting that “From both sides, we have seen [LEO/GEO] requests come in from customers.”

Read more: OneWeb emerges from bankruptcy, ready to launch

Getting OneWeb’s Gen 2 constellation into orbit could help offset some of the hybrid network demand. It will dramatically increase capacity. Eutelsat’s commitment to suspend the dividend payments and focus cash flow on this deployment speaks to the companies’ priority in delivering bandwidth to the market.

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A different OneWeb Gen 2 constellation

The Gen 2 constellation will not, however, be that which OneWeb has talked about in the past. Eutelsat CEO Eva Berneke says it will see some changes from the original design, “Eutelsat’s future FlexSat will enable reduced investment in OneWeb Generation 2.”

The company expects fewer satellites will be required, with higher fill rate and lower cost per gigabit delivered to customers. That combination points to significantly improved margins for the LEO offering.

Read more: Eutelsat makes major LEO commitment with OneWeb investment

Masterson is confident in the demand for the newly combined services, particularly in markets currently served by OneWeb’s LEO constellation. “Today, we don’t have enough capacity to meet the needs of [north of 50] markets. And that is before the growth in demand that will be experienced in those markets as low latency connectivity [comes online]. We are highly confident that as much capaicty we can provide will get consumed in those markets in particular.”

And because the companies can cooperate more closely in the design and planning of the Gen 2 network, Masterson sees “a much more efficient” solution in orbit.

Terminal challenges

This LEO/GEO hybrid architecture depends on the ability to seamlessly transition traffic across the LEO and GEO assets where necessary. Dynamically selecting the best network – based on congestion, traffic type, cost, and other factors – is critical to realizing the synergies lauded in the announcement.

That approach comes with its own challenges. To deliver seamless transitions between LEO and GEO planes on a single terminal requires more advanced hardware. For mobility segments such as aviation, that also raises questions about the power requirements for terminals serving both orbital planes.

Read more: De-risking IFC with OneWeb’s new JetTalk terminal

Eutelsat sees 70% of internet traffic from video today, content that is rarely latency-sensitive. It is well suited to be carried on the company’s high capacity GEO satellites. LEO will connect the gaps between that GEO coverage.

Specifically in the Aero mobility market, the companies propose that LEO will deliver an extended coverage footprint on polar routes, as well as increased capacity around hubs, while GEO satellites will continue to carry the bulk of the traffic.

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The transaction values OneWeb at $3.4bn, a boost from the recapitalization of approximately $2.2bn in late 2020 to bring OneWeb out of bankruptcy.

Trading under its existing name, OneWeb will continue to operate the LEO business, with OneWeb’s headquarters remaining in the UK. Eutelsat will also apply to list on the London Stock Exchange, in addition to keeping the Euronext Paris listing.