Eutelsat Communications S.A. (ETL) Earnings Call Transcript & Summary

Good day, and welcome to this conference call and webcast held by Eutelsat. Today's conference is being recorded. At this time, I would like to turn the conference over to Eva Berneke, CEO. Madam, please go ahead.

Good morning. Welcome, everyone, and thank you for joining us on this historic occasion where we'll present our project to combine OneWeb and Eutelsat. I'm Eva Berneke, CEO of Eutelsat, I'm joined by Neil Masterson, CEO of OneWeb as well as on my side, the Eutelsat team with Michel Azibert, Deputy CEO; and Sandrine Téran, our CFO. Before we actually start discussing in detail the combination of Eutelsat and OneWeb, we want to give you a quick rundown of Eutelsat's financial year '22 results, which has just been finalized by the end of June and which are also published today. The full earnings presentation with the usual level of quite a lot of detail is available on our website. In order for you not to be listening to me the whole time, I propose Sandrine to take us through the Eutelsat '22 results. Over to you, Sandrine.

Thank you, Eva, and good morning, everyone. We delivered a robust performance in fiscal year '21, '22 with revenues slightly above the midpoint of our guidance range, a stable industry-leading profitability and a continued strong free cash flow generation, which is well above our range of objectives in detail. Revenues for the 5 operating verticals stood at EUR 1.148 billion on a reported basis and EUR [ 1.121 ] billion at the 1.20 euro-dollar rate on which our objectives were based. This represents a 3.8% decline on a like-for-like basis and sits slightly above the midpoint of our expected range of EUR 1.110 billion and EUR 1.130 billion. In spite of this decline, we delivered an industry-leading level of profitability with a 75% EBITDA margin stable year-on-year. Cash CapEx amounted to EUR 280 million. It is lower than last year which was characterized by anticipated leases and ECA repayments and well within our EUR 400 million envelope. Discretionary free cash flow stood at EUR 443 million on a reported basis. On an adjusted basis, as per financial objective definition, which are notably based on a 1.20 euro-dollar rate, it stood at EUR 460 million, well above the range of objective of EUR 400 million to EUR 430 million. Our net debt-to-EBITDA ratio stood at 3.27x versus 2.88x last year, an increase, which reflected our investment in OneWeb. We remain comfortable compared to our medium-term objective of around 3x considering that we still expect to receive the Phase 2 of C-Band proceeds, which represent $382 million pretax. And our recommended dividend per share of EUR 0.93, stable compared to last year. In the context of the transaction announced today, a scrip option will be proposed to shareholders. With a robust backlog and industry-leading profitability and a proven ability to generate a high level of free cash flow, Eutelsat is in a strong position to face the challenges of fiscal year '22, '23, which is expected to be the last year of transition before a return to growth from fiscal year '23, '24, driven by new in-orbit resources. Broadcast revenue trend is expected to materially improve in fiscal year '22, '23 relative to fiscal year '21, '22, standing at minus 6.9%. Nevertheless, while the impact of the Nilesat headwind will washout from mid-October 2022, revenues will be negatively affected by the anticipated nonrenewal of the capacity contract with digital, leading to an overall mid-single-digit decline for this application. Data and Professional Video revenue trend in '23, we remain largely in keeping with the mid-single-digit decline trend reported in fiscal year '22, minus 4.2%. Government Services revenue will reflect, on one hand, the ramp-up of EUTELSAT QUANTUM and on the other, the carryforward effect of fiscal year '22 below average renewals. The outturn of the fiscal year will also remain dependent on the outcome of future renewals. Fixed broadband and mobility will keep growing in fiscal year '23, although at a slower pace compared to the massive double-digit growth recorded in fiscal year '22, respectively, plus 36% and plus [ 16% ] ahead of the arrival of incremental capacity. Taking these elements into account, we expect to generate revenues from the 5 operating verticals of between EUR 1.150 billion and EUR 1.180 billion in fiscal year '23 based on a euro-dollar rate of 1.00, this represents a minus 4% like-for-like decline at midpoint versus fiscal year '22 in keeping with the trend of fiscal year '22. Thanks to the new capacity, including notably the firm precommitment secured on EUTELSAT KONNECT VHTS and EUTELSAT 10B, revenues are expected to resume growth from fiscal year '24. Cash CapEx will not exceed EUR 400 million per annum for each of the 2 fiscal years, fiscal year '23 and fiscal year '24. We will continue to leverage all measures to maximize cash generation with an objective of adjusted discretionary free cash flow expected at an annual average of EUR 420 million at a euro-dollar rate of 1 for fiscal year '23 and fiscal year '24. This is equivalent to a cumulative adjusted discretionary free cash flow generation of EUR 1.361 billion over 3 fiscal years, fiscal year '22, fiscal year '23 and fiscal year '24 at a euro rate of 1. [indiscernible] put differently, at an average annual free cash flow over the 3 years exceeding EUR 450 million. We remain committed to a sound financial structure and continue to target a medium-term net debt-to-EBITDA ratio of around 3x on a stand-alone basis. As far as dividend is concerned, EUR 0.93 per share dividend will be proposed to the upcoming AGM with a scrip option. Now handing over to Eva.

Thank you, Sandrine for this very fast headlines from Eutelsat's '22 financial results. As you can see, they are strong and in line with expected, including a dividend with a scrip option. Normally, we'd be spending a lot of time going into details of these results, and you'd have lots of great questions to drill in, but we actually want to shift gears and spend a lot of the rest of the time on this new combination where OneWeb and Eutelsat join forces. First, a few words on the highlights of the transaction. And then I'll also introduce you to Neil Masterson, the CEO of OneWeb, who is joining us for this part. It truly represents a transformation for our company, creating a platform for strong growth for the next decade to come for the combined entity, and it presents a unique first integrated LEO-GEO player. The operation is based on a full share combination of OneWeb and Eutelsat leading to a 50-50 ownership of the combined entity. It's a natural next step following the acquisition of a minority stake in OneWeb by Eutelsat in '21, as well as the global distribution partnership that we signed in March 22 and today's extensive new commercial agreement. The deal is in line with our long-held commitment to continue to support OneWeb and step up when the occasion is right. The occasion is right now. The new entity will be uniquely positioned to address the fast-growing connectivity market, which is estimated at around EUR 16 billion by 2030, addressing multiple verticals with a [ lot of ] public and private needs. And moreover, the technology revolution of GEO-HTS satellites and LEO constellations is expected to drive disruptive changes paving the way for next-generation solutions. The combined entity is poised to create strong strategic value with around EUR 1.5 billion potential incremental value creation from a combination of revenue, CapEx and cost synergies and double-digit revenue and EBITDA growth for the next 10 years. The new entity will be financially solid, will Eutelsat's strong cash flow generation, providing visibility and funding to develop OneWeb's high-return next generation of satellites. In terms of governance, this operation has the full approval of all strategic shareholders of both entities, notably BPI France and FSP who is committed to vote in favor of the transaction. [indiscernible] , a more recent shareholder in Eutelsat is also supporting the combination. The combined entity will have a balanced ownership consisting of a substantial free float along with anchor public shareholders and supported private investors. First, we take a look at the market opportunities that we are addressing. Through this combination, we'll address the future needs across all connectivity verticals, thanks to the disruptive change brought about in the revolution of both HTS GEO capacity and LEO constellations. First, Eutelsat provide HTS technology, which is based on frequency reuse and it's becoming the standard for satellite operators. The technology is constantly improving, and the next generation of VHTS satellites is close on the horizon. This technology offers unprecedented throughput, low level of CapEx per gigabit as well as flexibility enabling the provision coverage density where it's required. It enabled us to address new verticals at a much larger scale, in particular, consumer broadband and mobility, and it's fostering all new bandwidth-hungry usages. But this is a combination with the Constellation world. So handing over to you, Neil, for the constellation view of this technology market.

Thank you, Eva, and good morning, everybody. So look, I think from a LEO perspective, this combination is very important by bringing together these 2 technologies. LEO's offer global coverage and low latency connectivity. So it is the combination of the 2 technologies that brings together high capacity, global coverage, high resiliency and also importantly, low latency. And the combination of these 2 enables many use cases and unlocks demand across multiple segments. To dig a little bit deeper, I think -- and I think the exhibit on the top left-hand side really speaks to the opportunities offered by LEO. LEO's offer ubiquity and coverage. And just as a reminder, OneWeb is a global constellation. And as you can see from this exhibit, particularly the top left-hand corner of this exhibit, they also offer much more low latency. And the numbers there are extremely stark. Now this really, really matters because low latency is a requirement for modern SaaS-based solutions, which underpin the digital economy. Therefore, LEO's widened the addressable market very, very considerably. Back to you, Eva.

So turning to the actual market opportunity because I think that's what makes this truly interesting. As mentioned earlier, satellite connectivity market represents a considerable growth opportunity and it's estimated to be around EUR 16 billion by 2030 with a CAGR of 14% for the decade to come. The B2B market is expected to triple in 10 years boosted by demand in particular 3 verticals: 6 data, including mobile backhauling and corporate networks, driven by network extension and increased use of data and the rising need for ambiguous coverage. Government, including military and civil needs, will be driving increases in defense spending and the rise of bandwidth-hungry usages, notably in surveillance and increasing need to connect remote sites. And finally, mobility, both air and seaborne will be stimulated by the growing size of the respected fleet, improved equipment leading to higher take-up rates and enhanced service quality leading to higher usage. The B2C side relates to consumer broadband for individuals, small businesses and communities. In this vertical, demand will be stimulated by the increasing pressure of the universal service obligations as Internet becomes a basic humanitarian need. And of course, it's favored by the high cost of terrestrial rollout, especially in remote areas. This is expected to result in a market multiply by 5. This growth in demand will be served by both LEO and GEO. By 2030, we expect satellite connectivity market to be a balanced split between both technologies. Let's have a closer look at the 2 companies and the combination of strength, which is created by this operation and which we'll be addressing this high-growth market. I'll start with Eutelsat, who many of you probably know well. But as a reminder, Eutelsat is one of the world's leading geostationary satellite operators with a global reach and strong European [ DNA ]. Its assets include global portfolio of orbital positions with strong positions, especially over the crowded EMEA arc with capacity in both Ku/Ka and C-Band. Eutelsat purely operates 36 satellites with a further 5 satellites in the pipeline providing enhanced HTS and VHTS capabilities. The first one actually launching in just a month's time on September 6. We are operating with a robust ground network, which also includes assets to 60 teleports and 3 data centers. We have over 500 engineering team recognized a world's experts in the fields, representing a wide range of expertise in engineering, program management and regulatory affairs. On the commercial side, Eutelsat enjoys a strong institutional relationships across Europe as well as globally, supported by long-standing partnerships with the European space industry. We're well positioned to size opportunities related to public procurement. Our sales teams composed of over 100 multidisciplinary executives supported in some 150 presales and sales support operating out of distribution outlets to serve our parallel portfolio of both blue chip customers and customers in the different verticals. Finally, Eutelsat enjoys a robust financial profile with over EUR 1.2 billion in revenues, around a 3.5-year revenue backlog and a 75% EBITDA margin with some EUR 440 per annum in cash flow generation, which brings our leverage to around 3.3 currently, as Sandrine was just highlighting. But let's take a look at the other strong player in this industry who will be part of this combination. Over to you, Neil.

Thank you, Eva. So as you can see from this exhibit, OneWeb is backed by a very high-profile institutional investors. And importantly, OneWeb is 1 of just 2 operational LEOs. I will repeat that 1 of just 2 operational LEOs. Now as an early mover, OneWeb secured 6 gigahertz of globally harmonized bandwidth, which is secured from the ITU. We also have the highest priority Ku-band, meaning the burden of coordination rests on the others, i.e., the others have to coordinate with us. The OneWeb constellation is composed of 650 satellites, delivering 1.1 terabits of sellable capacity. Now 2/3 of the fleet is already deployed. And right now, we have most of the satellites required to complete the constellation are actually manufactured. Gen 1 is fully funded. We've already raised EUR 6.3 billion, and Gen 2, which is under assessment right now, will provide much more capacity at a much reduced cost. Importantly, we have strong commercial momentum with 42 distribution partners signed up in the last 12 or so months. Back to you, Eva.

Thank you, Neil. Thank you for this snapshot of OneWeb. And I think as you can see, these are 2 very different companies with some very different strengths joining forces at a pivotal moment in time. But turning to why we think these successful partnerships make sense is actually building on a successful partnership that started in April '21. With this operation, Eutelsat and OneWeb are cementing this partnership. As a reminder, Eutelsat had announced a EUR 550 million investment in April '21, which was completed in September '21. After that, it exercised 165 call option in October 21. As a result, Eutelsat is already the second shareholder of OneWeb with just under 23% stake and is fully integrated in the governance of OneWeb with 3 board seats. So Neil and I know each other well already. Eutelsat is also already commercializing OneWeb services across key verticals, enabling OneWeb to benefit from Eutelsat's commercial reach and expertise. In the context of growing collaboration, Eutelsat and OneWeb launched a global distribution agreement in March '22 and today, we announced a new exclusive commercial partnership addressing mainly the European and the global cruise market, which is also signed today. Meanwhile, the 2 companies are progressing on a joint technical and regulatory work streams, shaping the framework for a future hybrid optimized GEO, LEO infrastructure. This includes reflecting on the possible mutualization of investments, both in ground infrastructure and processes of tools as well as the design of the second generation OneWeb, which is already able to leverage Eutelsat's strong institutional relationships and regulatory experience and to counter and coordination support in addressing policy agenda shaping across the industry. So we believe it's a powerful financial and business combination because the activities of Eutelsat and OneWeb are highly complementary. In a snapshot of what the combined entity will look like, you see that broadcast, which is most effectively addressed by GEO will represent 40% of revenues in financial year '25 in spite of a slight erosion, but is also a strong generator of cash flow to be reinvested in the high-growth verticals. Two high-growth verticals with B2B connectivity, which will be the largest part of the business standing around 50% of the combined revenues in '25. And then finally, B2C connectivity, which initially represents 10% of revenue with an even higher future cash generation potential. So the connectivity verticals will be addressed by both GEO and LEO assets. Eutelsat and OneWeb's ability to combine GEO and LEO will provide the absolute best solution to address multiple customer needs, and it represents a disruptive game changer in our industry from day 1. We've already started to work on this. This slide shows a few examples of what can already now be done. In aero, with its need for one hand, high throughput around airports and main routes requiring the density of LEO and then the other, the continuity of service and border planes, which will best be addressed by the ambiguity of LEO. The cruise market where surges in demand at peak case will require GEO density. We once again service continuity requiring LEO ubiquity. And a similar picture can be done for the oil and gas market. All of these cases, the complementarity of Eutelsat and OneWeb will enhance network resilience and improve quality of service. We've also built an integration road map going forward. From the building box described here, we have a clear road map towards a fully integrated LEO-GEO offering. Starting with the resale of LEO capacity by Eutelsat as a standalone product under the existing distribution agreement, which is already live today. To be followed by the end of the year via bundled LEO-GEO packages with GEO and LEO products sold together to customer as a one-stop solution covering all requirements and stimulating up and cross-selling. And then the next step is to -- within 2 to 3 years to have it fully completed with the [ mutualization ] of respective networks and tools for better integration of LEO and GEO. This will include a common ecosystem enabling asset utilization and resource optimization, an unfilled customer experience through shared network management and monitoring tools and a flexible service catalog tailored to each market as well as the convergence of terminals and antennas. Ultimately, a fully integrated offer with intelligent routing and a single terminal and fully utilized network and automated routing, i.e., automatic selection of the most appropriate network depending on the application is the target. And this will result in completing seamless experience for customers and will be fully operational with the Gen 2. We believe that this will lead to a lot of new use cases as illustrated here in both enterprise, land mobility and consumer broadband. Finally, the concept of a hybrid dual infrastructure will enable us to reduce CapEx notably via the rightsizing of OneWeb's Gen 2, the combined infrastructure will, in particular, address situations where high volumes of connectivity demands are focused in specific geographic areas. When we look at our numbers, around 70% of Internet traffic comes from video, quite a lot of that is Netflix and YouTube, where GEO capacity is a well-suited infrastructure and most of those users are not that latency sensitive. GEO satellites can complement LEO with a targeted capacity when demand is high. An optimized constellation will require fewer -- total number of satellites when you combine the fleet and higher fill rates for the entire constellation. At the end, an interrupt terminals for reception and a seamless network will improve user experience. Maybe, Neil, also just to hear from you on customer questions on you coming from the deal world.

Yes. I mean, based upon my experience of being in the market, again, these technologies are highly, highly complementary. And so customers where they are civilian or military or recognize and want this interoperability and this combined offering, which will be highly differentiated in the market. Back to you, Eva.

Thank you, Neil. And I think it highlights that from both sides, whether it's OneWeb or Eutelsat, we have seen these requests come in for a customer that says, this makes sense to combine this will give better customer service. It will enable us better to address these needs. However, of course, we need not to forget that also on the ESG side, both OneWeb and Eutelsat are building on strength and addressing some of the very important ESG objectives. If you've seen any of the OneWeb commercial, you know that bridging the digital divide is a mission of OneWeb. The mission to bridge the digital divide, thanks to the combination of assets and know-how is extending our churn reach and it opened up new means to address the world's digital white zones. And I think right now, especially OneWeb's Alaska trials is clearly showing that this is bringing connectivity to areas that had not before. But also delivering on a strong environmental benefit, permitting optimization of fleet by both entities will lead to overall adaptation of a number of satellites and thereby also the potential of space debris as well as launches and ground infrastructure. And in addition, we'll coordinate our efforts on regulatory aspects of space environment, which is rapidly becoming a very big issues with all the competitors going into space. OneWeb and Eutelsat have the same objectives and is very focused on delivering on these ESG objectives. However, it's not all about ESG, we also want to talk a little bit about the value creation and robust financial profile of the combined entity. Starting with financial objectives between now and 2030. In terms of revenue, we are forecasting a low double-digit CAGR over the next decade. Connectivity will clearly drive this growth and represent the majority of revenues by financial year '25. In parallel, EBITDA is expected to grow at mid-teens, CAGR with an EBITDA margin converging towards best-in-class levels for the industry. EBITDA minus CapEx is expected back in positive territory by financial year '25 or '26 depending on Generation 2 CapEx phasing. Gearing, which will stand at 4x net debt post the operation will be rapidly reduced on the back of a strong EBITDA growth backed by disciplined financial policy. Our medium-term objective is to continue a leverage of around 3x. The suspensive dividend will contribute to this acceleration. Turning to the combined investment plan and CapEx outlook. On the Eutelsat side, there's a limited maintenance CapEx needs for the 5 satellites that are under procurement are already partly paid for. Only 1 video hotspot reprice replacement in the short term. And Eutelsat future Flexsat, will enable reduced investment in OneWeb Generation 2. For the OneWeb, I'll remind you that Generation 1 of the constellation is already fully funded by the EUR 6.3 billion raise so far. Generation 2 will see major enhancements through multi-terabyte capacity and with a significant reduction in cost per gigabit and increased flexibility that will lead to a much higher fill rate and extended lifetime compared to the Gen 1. CapEx of the combined entity is anticipated at an average of EUR 725 million to EUR 875 million over the financial years '24 to '30. And it's likely to be front-end loaded in the earlier part of this period. But this investment plan will be supported by cash flow generation from Eutelsat and OneWeb combined. Value creation and synergies in more detail. In terms of revenue, we anticipate around EUR 150 million in annual revenue synergies with a hybrid GEO/LEO offering that provides a differentiated value to customers as well as improving the fill rates, some EUR 80 million synergies are expected to be reached as early as year 4. The combination of the 2 entities is expected to generate annual cost synergies of some EUR 80 million at run rate by cost-avoiding at OneWeb as well as eliminating cost duplication between 2 entities. This will, therefore, be done in a limited implementation cost and low execution risk. The full run rate is expected to be reached in year 5. And finally, on the CapEx side, we anticipate average annual synergies of around EUR 80 million as of year 1, leveraging our hybrid GEO/LEO satellite infrastructure, leading to reduced CapEx at OneWeb Gen 2 and for GEO replacement in the midterm. There will also be other procurement synergies, notably around ground infrastructure. These synergies represent the balanced breakdown between revenues, costs and CapEx and taken together, they equate to around an NPV of EUR 1.5 billion post tax and net of implementation costs. Turning to the transaction terms to give you a feel for how this is going to be achieved. An MOU has just been signed for the contribution of OneWeb shareholders to their stake in OneWeb to Eutelsat, which will come in exchange of newly issued Eutelsat shares. The transaction will be paid for in Eutelsat shares valuing OneWeb at $3.4 billion, valuing Eutelsat shares at EUR 12 per share, including the dividend and before synergies. As a result, existing OneWeb shareholders will hold 50% of Eutelsat's share capital. Prior to completion, Eutelsat will pay an ordinary dividend of EUR 0.93 per share, as Sandrine mentioned, which is expected to be paid in November '22 with a scrip option. As mentioned earlier, the transaction has the full support of OneWeb shareholders and Eutelsat reference shareholders. It's been unanimously approved by the respective Board of Directors with undertaking from Bpifrance and FSP to vote in favor for the transactions at Eutelsat's EGM. And the combined entity name will be Eutelsat, and Eutelsat will continue to be headquartered and domiciled in France and listed on the Euronext Paris Stock Exchange. It will also apply to be admitted to the London Stock Exchange for dual listing. OneWeb will remain a U.K. company based in the U.K., and the U.K. will be used -- and we'll use the OneWeb name extensively commercially. The U.K. government will keep its exclusive rights in OneWeb. The integration activity will probably take place over 12 months following the transaction to optimize synergy delivery. The transaction will lead a combined group of balanced shareholding structure and governance. The new entity will be chaired by Dominique D'Hinnin, Eutelsat's, current Chairman, with OneWeb's Executive Chairman, Sunil Bharti as Co-Chair. The Board of Directors will comprise 10 independent members, 2 Bharti representatives, 1 from Her Majesty's Government and 1 from Bpifrance. I'll be the Executive Director of the new entity and will head the Committee -- Executive Committee. Other appointments will be announced in due course. The illustration shows the pro forma shareholding structure of Eutelsat post combination. You will see the large number of strategic shareholders across both Eutelsat's current anchor shareholders as well as OneWeb. Finally, in terms of time line is kicked up with today's announcement. It's expected to obtain antitrust and regulatory authorizations somewhere between Q4 this year and Q1 '23. The transaction is expected to close in the first half of calendar year '23 subject to final agreement of the definitive documents as well as consultation of Eutelsat's employee representatives and clearance of legal documentation by the French stock market authorities. It will be submitted for approval at an extraordinary general shareholders' meeting of Eutelsat shareholders to be held in '23. A few words to conclude. This combination leads to the creation of a unique global leader in connectivity with world-class assets. The operation is underpinned by strong operational and financial complementarity between Eutelsat and OneWeb. OneWeb and Eutelsat together is ideally placed to address the massive growth opportunity in connectivity. The new entity is forecast to deliver double-digit revenue and EBITDA growth for the next decade. And we expect to generate significant shareholder value with EUR 1.5 billion incremental value creation from synergies. It presents, we believe, a truly unique investment opportunity in the European-listed telecom and space universe. This concludes my presentation. Big thank you to Neil. And Michel, Sandrine, Neil and I are now ready to take any of your questions. Thank you for listening.

[Operator Instructions] We will take our first question from Terence Tsui from Morgan Stanley.

Thank you very much for the presentation and all the details that you provided today. I've just got a couple of questions around the investment profile of the combined entity. Perhaps you can say just a bit more color around the Gen 2 CapEx, how many satellites do you envisage Gen 2 comprising? And what do you think the CapEx specifically like on a per satellite basis could be for those satellites? And then thinking just a bit further out, how do you envisage the payback from all of these investments that you are making? The Eutelsat CapEx is effectively doubling. How do you get confident over the long-term payback given there's so many other competing LEO constellations that are planned to be launched in the next couple of years or so?

Neil, maybe I'll start, and then I'll let you complement because you certainly know this better than I on that. As you can see, we do expect a step-up in CapEx over the next decade. The majority of that being linked to the need to invest in Generation 2 satellites for OneWeb. As of today, that is not fully detailed. It's on the drawing board, as I'll call it, and it's -- what's quite important is that we have estimated as part of this deal the CapEx needs going into this and how we can fund that over the next 5 years to come. Neil, you want to say a word or 2 on your thinking on Gen 2?

Yes, sure. So we have spent quite a lot of time examining and designing Gen 2. I think one of the real merits of this deal is that by actually designing it together, as was intimated in the presentation material, we can make a much more efficient Gen 2 by combining the LEO and GEO assets together. And Pascal Homsy, who is the CTO of Eutelsat, is actually the Chair of our Technology Committee. So we'll be collaborating even further on the design of Gen 2. With respect to your questions regarding payback, et cetera. I would just say this, what we're seeing is, and particularly in the markets that we're already serving, particularly in certain markets 50 degrees north, is that today we do not have enough capacity to meet the needs of those markets. And that's before the growth in demand that will be experienced in those markets as low latency connectivity is experienced by communities, businesses and governments. So we feel very good about the prospects for Gen 2. We know we are highly confident that as much connectivity capacity that we can provide will get consumed in those regions in particular.

Thank you, Neil. We want to take the next question.

We will take our next question from Aleksander Peterc from Societe Generale.

I just have a few. The first one would be on the GEO/LEO hybridization, which seems to me to be the key attraction of your combination. So is this ready soon? Is it contingent on a successful Gen 2 launch or a related date? When can we expect this differentiation to kick in? My second question is on your long-term over-the-cycle assumptions for the combined entities' CapEx to sales intensity. So where do you expect this ratio to sit when you reach a steady state by, say, 2030? And then finally, what will be the impact of this combination on your credit ratings? And any implication for potential cost of future refinancing and funding?

Thank you for these questions. Let me try to address the first 2, and maybe Sandrine will take the one on our credit rating. But starting out with the GEO/LEO relationship, it's a multistep approach in the very short term, we will see combined commercial offers already happening as we speak based on our commercial agreement, which is already signed back in March, but also on the exclusivity agreement that we are also co-signing today. In the medium term, over the next couple of years, you will see more technically integrated offers also where we start utilization of networks and tools so we can better integrate it. And then also finally, and that will probably be beyond the next couple of years, we'll see a fully integrated offer where we also have intelligent routing and single terminals. That takes slightly longer than the next couple of years. So it's probably at least 4 to 5 years out. But there are several steps to take to actually have these joint offerings today where you take a big advantage of the ambiguity and continuity of service and low latencies of LEO for certain applications, while you leverage the low cost and high capacity to focused capacity of GEO satellites. It is based also on the launch of several high throughput satellites of Eutelsat. As you know, we will be launching the VHTS in September out of Kourou. We've already launched the QUANTUM, which is now fully sold out as the very first of its kind. And we are also today announcing investment in an additional FlexSat, which will be the combination of the connectivity probably over the Americas serving especially the maritime market. So it truly will be CapEx spent for a big majority Generation 2 of OneWeb, but also combining this with HTS satellites for high throughput, low price GEO capacity. On the final one on the credit rating, Sandrine, maybe you want to say a word or 2.

Yes. Thank you, Eva. So hello, Aleksander. So on the credit rating, we haven't had yet some ex-ante discussion with the rating agencies. So this is the work that we will do with the rating agency within the next coming weeks. I think it's important to highlight that OneWeb has no financial debt on the balance sheet. And so there is no additional debt in the closing on the consolidated perimeter. And we think that we are showing a strong deleveraging trajectory that will support the rating for the future. And we expect, as Eva mentioned, to start at closing with 4x leverage, with a fast deleveraging trajectory, as I mentioned before.

Next question?

We will take our next question from Roshan Ranjit from Deutsche Bank.

I've got 3, please. I guess, first one, just to follow up on one of the other questions around the Generation 2. And if I -- I know Neil, I think you said about things hopefully in the plan, and if I have think back to some of the previous comments, and I think the satellite manufacturer was suggesting that there was a cost of around $1 million per satellite as part of the Generation 1 constellation. I guess, as technology has improved, and I think as was alluded to in previous calls, that cost per unit is likely to have gone down. And I think there was a number at the end of last year, which suggested around $3 billion for Generation 2. So if you could just comment around that or things have not changed, that will be very useful. Secondly, also just to get, I guess, an idea of, I guess, why now for this deal? Because as you highlighted, over the last year, we've seen a much closer collaboration between Eutelsat and OneWeb resulted in that distribution partnership agreement earlier this year. So I guess, what is the kind of trigger point now for this deal? And I guess that is due to both Eva and to Neil. Eva, is there something that's changed on the broadcast side maybe where you feel that this is the right time to jump more into, I guess, LEO constellation? And the last question is just around the dividend. Now you've suspended it for fiscal year '23 and '24, ambition is to return to a more shareholder-friendly message from '25. Is that purely dependent upon the kind of leverage hitting this around 3x that you messaged? And how should we think about that stepping up over time?

Neil, I actually suggest that you take -- you start out with the first one here on the Gen 2 spending. It's -- and then I'll take over on -- well, you can also give your say on why now is a good time, and then I'll take over and talk on my perspective. And let's hope we'd be aligned. But why don't you start out.

Okay. I'll do that. So first of all, on satellite cost, I think that -- I mean, currently, the price -- the cost of the satellite depends upon the size and sophistication and what you put in the satellite. So I think our perspective is somewhat different perhaps than some of the others out there where we think fewer more powerful satellites actually is necessarily the way to go. So the key thing that I look at, frankly, is what is the cost per capacity that you can deploy. And we're not in a position to give that number right now. But I would just refer you back to my earlier comment that we think, we're very confident, that the capacity, we'll be able to provide much, much more capacity at a much, much lower cost with the satellites that we're designing together with Eutelsat. Why now? So look, I think this is -- from my perspective, this is a real recognition of what we're hearing in the market. And as I hinted before or as I stated before, whether it's a civilian customer or a military customer, it is the -- they essentially all want the same thing. They all want connectivity but they also want the power and interoperability of these combined offerings. And so from my perspective, it's a real recognition of what customers are telling us. And also the pace of which we have to move. This is a very fast-moving market, and making this combination right now speaks to both meeting the customer demand but also the pace of which the market is moving and how fast we want to move collectively together. Back to you, Eva.

Yes. And thank you, Neil. And I think I'm 100% in line with you that this is what we hear in the market. This is what customers are asking for saying, "Can we get both? We both want the highest throughput capacity to flexibly provide a big amount of capacity. But of course, we also want the low latency. Can you do that?" And I think we now can say, "Yes, we can do that." And we will do that together with OneWeb, and we will even want to do it in a seamless fashion. And to get to a point where we can do this in a seamless fashion across terminals, across networks, across tools and services, we need to be one company. And in this sector to be a one company and to have such an offer takes time. So now is the right time, especially given the architecture and thinking about Gen 2 to start that work together. And we need to sit in the very same boat to have the very same objectives to get there. So that's why the timing is right now. The big value creation of EUR 1.5 billion is because we sit in the very same boat and we look at the same huge market opportunities that the customers asking for it at the same time. So doing this together where we fully can sit side by side developing offers against this market, we need to do that from now. Also, I think it's important to say that it combines a truly strong set of shareholders on both sides with strong telecom shareholders with the Bharti Group on OneWeb. And as you know, Eutelsat has now for a couple of years have been working on our telecom pivot strategy. And this brings into more focus this pivot towards connectivity, which we've been talking on for a couple of years. It's taking a leap forward on that journey with the telecom pivot strategy. I think that was the key questions here. On the return to leverage and dividend, it's clear that we will suspend -- we'll pay the dividend this year with a EUR 0.93 per share dividend with a scrip option. But then we will suspend dividend for a couple of years. Exactly on until when, we don't know. We do expect to return to a dividend policy over time. It will depend on both profile of CapEx investments, but we do expect to return to a dividend policy in the medium term.

We will take our next question from Priya Viswanathan from Societe Generale.

A couple for me, please. Could you give us an estimate of the integration cost that you expect to have to spend for bringing about the actual execution of the deal? And I have another one in terms of the deleveraging plan that you have for getting back to the 3 turns in the medium term. Considering that you haven't had a conversation with the agencies and perhaps that you have already got the negative outlook from S&P this March, which indicated there was already limited headroom there, is hybrid issuance something of an option that you will explore in case it puts your BBB minus rating at risk with S&P?

Let me maybe start with the first one, and then I'll hand over to Sandrine for the second one on the S&P and ratings agencies. I think on the estimate of cost integration, I think the EUR 1.5 billion NPV is actually net of integration costs. So I think that's worth to take into account. But foremost, I actually want to say that given the high growth outlook for OneWeb and the complementarity of assets, a lot of these synergies are not necessarily very costly to implement. It's about building a commercial network together leveraging the strengths of both rather than a big overlap in commercial network today. It's about building the future generation, too, in the combination with FlexSat from Eutelsat in the right way rather than eliminating a set of network. So in terms of actually integration cost, of course, there will be some. But in general, it's a very complementary set of synergies we are bringing here and thereby also bringing them up to full speed over the years, given that this is very much focusing on building a growth company. On the deleveraging plan and the agency discussions, Sandrine, maybe you want to say a word or 2?

Yes. Thank you, Eva. So yes, as we said, clearly, the reduction of leverage will be a very big area of focus during the first year of the combination. We will keep all options open. So if hybrid can make sense at one point in time, of course, we will look at it. So all options are on the table. And the focus will definitely be to deleverage the company in the first year of the combination.

If I may be allowed one follow-up. Can I confirm that it is your stated intention to remain investment grade from both agencies for the combined entity also?

As I was saying, we haven't had discussions ex ante with the rating agencies. So this is all the work that we will do in the next coming weeks to see what is their positioning around this.

We'll take our next question from Sami Kassab from BNP Paribas.

I have several questions. Perhaps the first one to start with, can you provide us with an update on Generation 1 in terms of entering to service date, '22 and '23 revenue guidance? And any breakeven year for OneWeb's EBITDA on a stand-alone basis to see how you think about Generation 1? Secondly, do you expect OneWeb to become eligible to the EU Commission constellation project now that it has merged with Eutelsat? And lastly, beyond LEO/GEO, can you comment on any technological differentiation you think Gen 2 will have compared to the other planned non-GEO systems out there.

Thank you for your questions. I think, Neil, do you want to give a little bit of an update on Gen 1 because there's actually a lot of really impressive progress here?

Yes, sure. So I will deal with the first and the very last question you had, and I'll leave -- and I'll refer back to Eva and Sandrine for the ones in between. So in terms of where are we in terms of implementation, as I mentioned in my earlier comments, we have 428 satellites in orbit right now, that's 2/3 of the space constellation deployed. We have about 25% of the ground stations already up and running and deployed with the remainder -- with another 50%, I imagine, to be completed by the end of this year. We are actually in service, 50 degrees north, which for the non-geographical view is basically from the U.S. Canadian border to the North Pole right across the Atlantic South Coast of England to the North Pole. And we are serving customers in Alaska, Canada, Greenland and also have a whole range of trials taking place in Northern Europe, which are -- in areas in Northern Europe. So pleased to say that we're making pretty -- we're making very good progress. We expect to continue our -- and we have contracted to continue our launches later this year. And as I mentioned before, we've almost completed the production of the remaining satellites, which will be deployed over the next sort of 9 months, I would say, in order to complete the constellation by the very end of the year. In terms of technical differentiation, which is your very last question. I'll just draw you to if you look at the OneWeb website, look at the various press releases and in particular, look at the press releases that we see -- that we demonstrate LEO/GEO connectivity with a multitude of different user terminal providers and manufacturers and also the demonstration that we've been doing with 5G. It's the integration of these offerings, that is the differentiation in the marketplace, and that is what customers want. With that, I'll hand back to you, Eva.

Yes. Thank you, Neil. Just addressing the EU constellation, it's clearly an area that we've been working intensely on for the last year. And we're also closely following some of the requirements that is likely getting drawn up and will come out to an RFP probably sometime this fall or winter. And it's clear that we would absolutely love to provide OneWeb capabilities both in Gen 1 but especially also in the Gen 2 for the EU constellation. And we're hoping to open up talks with the people behind the EU consolation in order to make sure that we'll be able to address the requirements put forward in the EU constellations. So yes, we definitely think that's a great opportunity, both for OneWeb and Eutelsat, but certainly also for Europe. If we take the next question?

We will take our next question from Ben Lyons from Credit Suisse.

I have a few, if that's okay. The first one is on the deal on the financials. So from my understanding, Eutelsat will be putting in a 23% stake in OneWeb plus the Eutelsat business, and then I guess you've got the remaining 77%. If I look at the sort of valuation there, EUR 3.4 billion for OneWeb, but I take out the implied stake at OneWeb, I think I get to a core business equity valuation of about EUR 1.8 billion. Is that the right way to look at it? And if I could sort of move on. This one is perhaps for Neil. How many of the Gen 1 satellites are actually active and in orbit? I'm just sort of looking at the failure rate. I think you've got to get to 588 to have global coverage. And as a further to that, I mean, does GEO CapEx have to increase if you want to supplement the global LEO network? Do you have to invest in VHTS on a more global basis? And possibly, if I could sneak in another 1 here. Just in terms of sort of the CapEx side, 20% -- EUR 80 million is about 20% of Eutelsat's CapEx in terms of the synergy number. That seems quite high. Where is that coming from?

Okay. Neil, should we start with the second one because this is a little bit in the continuation of the first question on the satellite, and then I'll come back to the valuation elements.

Yes, sure. So we have -- as I stated previously, we have 428 satellites in orbit today. I'm not quite -- I can't quite recall. There's a few of those which are still in orbit raising. But as I mentioned, the -- we have 428 satellites in orbit today. You are correct in that in order to operate the constellation, we need 588, but the goal is to make sure that we have in orbit spares and also a batch on the ground should we need to deploy them. So that gets us to the number that you quoted. In terms of the kind of -- I think the point here is -- the point here is that we feel as though, particularly for Gen 2, and I think this is what the exhibit in the presentation we're seeking to communicate, is that by combining these LEO and GEO capabilities, that combined, we can basically, we can deliver less CapEx going forward. That is the point of the exhibit. Back to you, Eva.

Thank you, Neil. I hope that gave a bit of background on the -- and where we stand here. In terms of some of the transaction highlights, the transaction is based on an exchange parity ratio rather than an actual acquisition value. But let me try to give you a few highlights. We believe that OneWeb is worth more than the USD 3.4 billion valuation that was implicit in the latest minority investment. Since then, the company has really advanced in terms of the deployment, as Neil just pointed to, and also successfully completed the commercial launch in Alaska and Canada. But if we base it on this implied USD 3.4 billion valuation for OneWeb from the last funding round, and then we account for, as you said, the 23% Eutelsat share in OneWeb, and then we have the 50-50 allocation between the 2 group shareholders, this implies a value per share around EUR 12 per EUTELSAT shares, EUR 11.1 excluding dividend. This means that we'd be issuing shares at a small premium over our Q1 share price and we'll be proposing to the Eutelsat shareholders this $0.93 per share dividend in November. I hope that answers your question, should we take the next?

Can I possibly just ask a follow-up. Just looking at it previously, do you think the OneWeb stake was incorporated in the share price then. If I look at sort of the Eutelsat business, if you include the stake, that would be sort of circa EUR 4 of that share price. So do you think the core Eutelsat business is worth around sort of EUR 8 a share?

I think this is based on a 50-50 parity ratio. So yes, there will be some element of the 23% stake of OneWeb in Eutelsat share price. I think that has been the fact for a while, that most analysts have integrated some value of the OneWeb stake in our share price and is the Eutelsat valuation, which equates to 50% share, whereas OneWeb has the other 50% share in this 50-50 parity ratio. That's how it works.

We will take our next question from Carl Murdock-Smith from Berenberg.

Two questions from me. Firstly, I was just wondering if you could talk a bit about the history of the talks between the 2 of you. And kind of how long discussions have been going on? I suppose I'm just mindful, Eva, that you've not yet finished your 7th month as CEO. And then secondly, I just wanted to ask about management compensation. Have you kind of debated or decided how that's going to evolve going forward? I'm just mindful that in the past, discretionary free cash flow has played a large part, both in the annual bonus and in the LTIP. And obviously, with the investment case and investment proposition changing significantly going forward is the -- is management compensation structure going to evolve?

Good questions. Thank you. I think this deal bases itself, and Neil has been there even longer than me. And luckily, I have a -- we have teams on both sides who have a good long history in both Eutelsat and OneWeb. So these are companies that know each other well and especially based on the acquisition that was done in last year, about 1.5 years ago. I think that was the start of this collaboration, and this is a big leap forward in these discussions, but the good collaboration and discussions to some extent started back at the first acquisition of the 23% stake in OneWeb. And since then, I think both Neil and I actually have joined the party and continued the very good talk and collaboration. And I'd say, it is also based on a very strong OneWeb Board and a very good collaboration in OneWeb Board in terms of real business focus from all Board members on getting OneWeb successful, getting the launches done, managing whatever headwind the Russian-Ukraine crisis had done on launches. It's really been a business focused on succeeding with OneWeb, and that's also a big part of why this can happen today. So to some extent, it's been a discussion going on for at least 1.5 years, if not longer. But of course, it's intensified a little bit over the last couple of weeks to get this done.

Yes, I would just, Eva, if I may? I would just second that. I mean, so I think that we were discussing -- discussions have been ongoing essentially since -- since I started back in November 2020. And to give -- to paint a picture for the investors on the call here, there's a very, very strong operational linkages across between OneWeb and Eutelsat today. We have a number of key personnel who formerly work for Eutelsat. At an operational level, there's a very high degree of collaboration. And I can tell you, this morning having been talking to some of our technical folks and being in a knock-in in our stock, a very high degree of excitement internally relating to this combination. Back to you, Eva.

Yes. Thank you. So I think to some extent, it's a very natural big leap, but a very natural big leap for both companies to move in this direction. On management compensation, you're right that for Eutelsat management group and including myself, we've had a big share of financial incentives, including free cash flow. As we're just starting our new financial year, that is also planned for this year. As for now, for the next 6 to 9 months, both Neil and I will have very much a focus on business as usual, delivering value from each of our companies until we have this merger fully cleared through all the different regulatory and competitive affairs. So we also need to have it through our general assembly in November, as I said. So as of now, it's quite relevant to maintain some of the same financial objectives. Then, of course, we'll need in the longer term, both to think about how this organization will work together. And naturally, we will also have to revise incentives. Most likely, that will be relevant some time in the spring to look at the incentive for the combined entity, given that we'll be in a much more growth-focused organization, where we'll also be doing quite a lot of network investments and investing in new technology, I think we will also potentially revise the mix between the incentives going here. As you know, it's not purely financial incentives. It's -- today, it's a mix of revenue and free cash flow generation as well as more individual financial incentives -- more individual incentives, including also ESG incentives, as well as employee and customer satisfaction incentives would be natural in a combined entity. But that is to be developed over time.

We will take our next question from Sami Kassab from BNP Paribas.

I have a technical question that requires clarification. When you say 50-50 parity ratio, I'm not sure I understand how the 23% stake in OneWeb that Eutelsat has today is accounted for in the 50-50. So my question is whether the 50% shareholder that get half of the new group, whether these include the likes of Bharti, SoftBank, the U.K. and as well as Eutelsat? Or whether Eutelsat is not included for each share in OneWeb in that 50% ratio? So do shareholders end up with 61.5% of the new group or just 50%?

Yes. It's clear that it's not included. It is a 50-50 parity ratio where Eutelsat value includes the 23%. So it's a 50-50 combination. Then there will be -- given that we propose a scrip dividend, depending on the uptake of the scrip dividend, that may change slightly. We don't expect it to. But it will remain around the 50-50 parity, but it does include the 23% ownership that we already have in OneWeb in those 50%. I hope that clarifies your question.

It does. Thank you, Eva.

[Operator Instructions]

Yes. I think we're maybe a little bit at the end of it. So if there's a single question left. Otherwise, we, of course, will be super happy to help you with any other questions through our Investor Relations team. But is there a single question where somebody is burning with? Doesn't sound that way, but we're here to answer any questions you might have. So feel free. I want to especially thank Neil for helping us out here and giving us very much more color on OneWeb and this deal from the OneWeb perspective. I'm looking forward to continue updating you on the progress of how we move forward with closing this deal. And of course, if you have any outstanding questions on the details of the Eutelsat's financial results for '22, which is also announced today, we actually do have Michel here also who has not been able to explain all the good things happening across Eutelsat. But if there are any questions on that, we are, of course, available -- so thank you to Neil, Sandrine, Michel, and to all of you for your time this morning. Have a great day.

This concludes today's call. Thank you for your participation. You may now disconnect.