O3b Networks Limited (O3b)
O3b Networks Limited (O3b)

 

O3b Networks Limited (O3b) is a global satellite service provider operating a constellation of 12 medium earth orbit (MEO) satellites, servicing telecommunications operators, internet service providers, and enterprise and government customers in emerging markets. O3b is short for the “other 3 billion” people that do not have ready access to the internet. Due to its close proximity to earth at 8 000 km above the earth versus geostationary orbit at approximately 36 000 km, O3b’s system combines the global reach of satellite with the speed of a fibre-optic network to provide low-cost, low-latency, high-throughput internet and mobile connectivity to its customers.


In November 2010, the company secured a debt and equity funding package amounting to a total US$1 180 million, to finance the procurement and launch of eight satellites. The funding was sourced from a diverse mix of investors, including strategic shareholders, commercial banks and developmental finance institutions (DFI’s), including the DBSA.
The DBSA participated in both the debt and the equity funding packages with a total facility of US$76 million (US$40 million debt and US$36 million equity).

 
Commitment
Exposure
Senior term loan
US$29.6 million
US$29.6 million
Standby senior facility
US$10.4 million
US$10.4 million
Equity
US$36.0 million
US$36.0 million
Total
(US$) US$76.0 million
US$76.0 million

 
Following the successful fundraising for the procurement and launch of the eight satellites, the company successfully raised additional senior debt funding amounting to US$85 million in 2011 to finance the procurement and launch of four additional satellites.

 


On 25 June 2013, O3b successfully launched the first four satellites and on 10 July 2014 the next four, bringing the constellation to a total of eight in-orbit satellites (five operational satellites and three in-orbit spares). In September 2014, the company began full commercial operations. On 18 December 2014, the company successfully launched satellites 9 to 12, which went into service on 15 March 2015, bringing the constellation to a total of 12 satellites (9 operational satellites and 3 in-orbit spares).


To date, there are 9 revenue generating satellites and more than 40 customers in commercial service on O3b’s satellite network operating across 31 countries. In December 2015, O3b secured additional funding (US$215 million debt and US$143 million equity)  to finance the procurement of 8 additional satellites (satellites 13 to 20) and the launch of satellites 13 to 16. It is envisaged that the additional eight satellites will enable O3b to meet expected future demand and provide the company with the economies of scale required to generate sufficient revenue and cash flows to service debt and replace the constellation at the end of its life.


TRENDS AND DRIVERS


In terms of developmental impact in Africa, O3b has been particularly successful. Africa as a continent has most fibre optic cable internet solutions centred on the large population centres which are typically centred around the coastal areas. However, large tracts of land on the continent that are sparsely populated have largely been left uncovered by internet services. O3b, with its satellite solution, has provided fast broadband services where historically nothing existed. Internet connectivity/broadband enablement is now recognised as a GDP growth driver, leading to governments enforcing roll-outs and service levels to ensure availability for the population. In addition, increasing economic interconnectedness between nations continues to drive investments in international capacity links between them.
Mobile broadband is gaining momentum in emerging markets as 3G/4G networks are being rolled out whilst increasing smartphone penetration, lower smartphone costs, and video usage over mobile devices and ecommerce are driving new applications and consumption.


The volume of mobile data has exceeded forecasts in most geographies and is expected to maintain its trajectory. However, this explosion in traffic may not lead to the expected increase in backhaul capacity if alternate technologies such as Wi-Fi offload are used to direct traffic away from mobile networks. Wi-Fi offload is expected to carry 60% of all mobile data traffic by 2019.


Digitisation, regulation, remoteness and crew welfare are driving increased connectivity needs in the energy sector. However, the recent low oil price levels have resulted an industry profitability squeeze and postponements of investments in new offshore assets by oil majors.


Maritime industry trends suggest a steady increase in demand for connectivity from very large and large ships driven by the cruise industry growth, requirements for real time connectivity by both passengers and crew and the need for high reliability of connectivity.

PEER ANALYSIS


There are three ways to deliver bandwidth via satellite, each with their advantages and disadvantages. These are:
• Geostationary earth orbit satellites (GEO)
• Medium earth orbit satellites (MEO)
• Low earth orbit satellites (LEO).


Alternative delivery mechanisms by drone and balloons are being investigated.


O3b’s satellites operate in the MEO space. The company enjoys at least a five-year lead time in the MEO space.
GEO satellites have low equipment capital expenditure and large choice of equipment when compared to O3b’s business model, which is highly capital intensive.  Geo satellites are, however, characterised by high latency, high operating expenses and lower throughput when compared to O3b’s satellites.


Three new LEO ventures were announced in the last 12 months but none of them have progressed beyond the design stage. If delivered, these projects would represent a threat in all of O3b’s verticals except trunk in the 2020+ timeframe as LEO satellites also promise low latency and global coverage. The first LEO systems are expected to be operational by 2021 are expected to exert pressure on prices, particularly in the cellular backhaul market. When compared to O3b’s satellites, LEO satellites are however expected to result in high inefficiencies, lower throughput, very large number of satellites and gateways, large network of distributors required and refurbishing costs. In addition, venture projects have significant financing and execution risks as their time to market is uncertain.


KEY SUCCESS FACTORS


• Low latency compared to GEO satellites
• High availability compared to many fibre networks
• High throughput
• Low operating expenditure
• Beams are steerable to provide near global uniform coverage
• Optimum orbit for maximum efficiency of the fleet
• The satellite configuration is easily scalable to address growing demand
• O3b’s technology is inherently less susceptible to unfavourable climate interference compared to GEO/MW
• Short deployment times. Together with other satellite offerings, O3b still leads the market in terms of ease of deployment. O3b services enable operators to extend networks without long lead times
• O3b’s technology is referred to as Fibre in the sky. The technology is considered to have the speed of fibre with the global reach of satellite.


CONCLUSION


In the short to medium term, O3b’s write-to-win and the already captured market appear secure and protected from competition. The business case is fully supported by industry growth and positive industry trends and the company’s technology appear unparalleled to that of existing competitors. The addressable demand appear significant enough to accommodate both O3b and existing satellite technologies. However, in the long term the company is likely to face significant competition from rivalling new technologies and continued roll out of fibre. O3b will however benefit to some extent from first mover advantage. Based on the above, O3b’s business risk profile is considered medium and stable

.
 
© 2013 DBSA. All rights reserved