What's going on?
Shares of Inmarsat rose 9% on Monday after the British satellite company announced it was being bought by private equity firms in a deal worth $6 billion.
What does this mean?
Inmarsat was originally set up by the United Nations to locate ships in distress; today, the company provides communications in places beyond the range of cell towers – including 35,000 feet up. Demand for the likes of Inmarsat’s 13 satellites (117 million feet up) can grow faster than it takes to build and launch new ones, with the sector attracting interest from Google, SoftBank, and Facebook in recent years.
In June last year, two of Inmarsat’s rivals made noises about a takeover that ultimately came to nothing. Instead, a collection of investment firms is now paying cash to take the company private after 15 years on the stock market.
Why should I care?
For markets: The buyer’s just as important as the price tag.
When Inmarsat was courted by rivals they were likely seeking “synergies” – benefits competing companies get from merging together. As Inmarsat’s new owners are private equity firms, there won’t be much of that – but Inmarsat will have the opportunity to work on upping its game without having to publicly justify itself to investors. According to investing legend Warren Buffett, the public-company spotlight can lead to short-term profit-chasing rather than a sustainable long game. That may be why Inmarsat accepted this deal after turning down a similar offer from a public rival last year – giving its long-suffering shareholders a cash payout worth 27% more than their shares were before news of the deal emerged.
The bigger picture: Private equity finally spends.
Private equity’s been sitting on a lot of unspent client money – more than $2 trillion, in fact. Telecoms companies are “defensive”, with pretty predictable cash flows – as opposed to “cyclical” firms whose fortunes swing with the economy. That may have made Inmarsat an attractive bet – even as UK private equity deals fall from favor.