Earlier this month, ViaSat announced that it was acquiring WildBlue Communications for $500 million, net of cash acquired. Given that ViaSat itself isnt really all that much bigger, with an enterprise value in the US$875 million ballpark, this is clearly a big deal for them. But is it the right deal? And are there other winners and/or losers? Lets see!
First, lets look at the numbers. With adjusted EBITDA of US$76 million, the deal comes in at a 6.6x multiple (not including tax effects) significantly lower than the trading multiples for the big fixed-satellite services firms. Of course, with EBITDA margins in the high 30s and growth rates of 20 percent+ annually, WildBlue is a pretty different animal, so some multiple compression is probably appropriate. But, (as we discuss below) we dont think thats the whole valuation story. For ViaSat, pricing the deal at this level allows it to be accretive to earnings from day one.
Next, lets consider the fit. For ViaSat, vertically integrating with their principal customer for their DOCSIS satellite modem product helps secure a long term stream of business. In addition, ViaSat gains WildBlues brand and marketing relationships that have enabled it to garner a subscriber base of over 400,000 saving ViaSat tens of millions in startup marketing expense. And then, of course therere the subscribers themselves. From WildBlues perspective, this deal addresses their long standing concern about how to secure financing for a follow-on satellite ViaSat-1 becomes that satellite. It also addresses the threat posed by ViaSats pending entry into the market with a technically superior satellite an entry that promised to make it hard for WildBlue when it had to compete with its principal vendor, and arch rival, Hughes, simultaneously.
Finally, it addresses a capital structure where the lions share of WildBlues cash flow was going for debt service, leaving little excess cash to return to shareholders. For all of these reasons, we think ViaSat had a strong negotiating position in its talks with WildBlue, which in turn drove the valuation for the deal.
How did WildBlues investors do? With a total of US$453 million in equity plus US$350 million in debt, clearly not everyone is being made whole with ViaSats US$568 million of cash and stock. However, if we note that earlier investors were crammed down during the December 2002 raise (US$247 million in prior investment became ~$50 million in pre-money valuation), then the equity investors since then ($206 million in all) probably received most of their money back, if a few years later then when they originally made their investments.
A move in that direction could then force Hughes to seek a suitor as well. We could also envision the trend of the modem manufacturers vertically integrating with the service providers and launching their own satellite capacity continuing globally so the folks doing satellite broadband outside North America could become targets as well.