Loss of Satellite Is Just the Start of Israeli Spacecom’s Woes

The destruction of the satellite last week threatens Eurocom’s impending sale of the company to a Chinese buyer.

SpaceX explosion destroying AMOS-6 satellite on September 1, 2016.
Screenshot of USLaunchReport

It happened all at once. A series of explosions during the final preparations for the launch of the Amos 6 last Thursday destroyed four years of work and $200 million of equipment just two days before the satellite was due to be put into orbit.

But the fallout from the disaster is far from over. It spells big trouble for Israeli company Space Communications, which owned and was to operate Amos 6. In addition, the strategic implications for Israel, one of only eight countries capable of launching satellites, are troubling.

Amos 6 had been designed and built by state-owned Israel Aerospace Industries, but IAI wasn’t responsible for the disaster. A preliminary investigation showed that one of the engines of the Falcon 9 rocket that was built and operated by the launch company, California-based SpaceX, exploded.

The investigation is just beginning, but Spacecom Chief Executive David Pollack said that as far as he knows, the explosion occurred during fueling, a very sensitive process that’s the responsibility of SpaceX. That company is controlled by celebrity entrepreneur Elon Musk, whose more famous business is the electric-car maker Tesla.

“The rocket launcher belongs to SpaceX and they are responsible for all that happens to it, including fueling,” Pollack said. The satellite itself was fueled earlier by IAI people – this fueling is also a sensitive process and was conducted using all the necessary caution and safety methods, Pollack added.

“It’s surprising that such a failure happened,” Pollack said. “I assume it will take time until we discover exactly what happened here, but as I know SpaceX, they have so many sensors and cameras that the examination will be relatively quick – a few days.”

SpaceX is the outfit that chose to place the satellite on the launcher during the preparation stage. During SpaceX’s first launches, the satellites were not present at this stage, but as the company acquired experience and confidence, it realized its new approach had its advantages, Pollack said.

The explosion didn’t cause any injuries, but it has caused Shaul Elovitch, the controlling shareholder of Eurocom that owns 64% of Spacecom, a big headache. Minority shareholders, bondholders and Pollack are just some of the people who will suffer along with Elovitch.

Spacecom provides satellite broadcast and communications services to telecom companies, internet service providers and television broadcasters in Europe, the Middle East, Africa and Asia via its Amos 2, Amos 3 and Amos 4 satellites. In another two months, Amos 2 was scheduled to cease operations, and Amos 6 was supposed to replace it and expand the services offered. Amos 6 was to provide twice the level of services of Amos 2 and Amos 3 put together.

Thus Amos 6 was slated to be the key to reviving Spacecom’s business after its older brother, Amos 5, went missing in space in November. Moreover, a successful launch was supposed to be one of the two conditions to move ahead with the sale of Spacecom, which is traded on the Tel Aviv Stock Exchange, to the Chinese company Beijing Xinwei Technology Group for over 1 billion shekels ($265 million).

Stock crashes to earth

All this goes a long way in explaining why Spacecom shares have plunged 38% since the explosion. The company said bondholders would get back all their money, but the shareholders have no guarantees.

Spacecom had expected the satellite that got destroyed to be its new revenue driver. In 2015 the company’s three operational satellites brought in revenues of around $64 million; Amos 5 brought in $34 million that year before it failed in November.

In addition to revenues from Facebook, Spacecom signed an agreement with the Israeli government to provide communications services using Amos 3, Amos 4 and Amos 6. The deal was estimated to be worth $164 million through 2021.

Spacecom’s market capitalization before the explosion was a bit above 900 million shekels, based on expectations that the deal with Beijing Xinwei would be completed at its 1.1-billion-shekel valuation. The difference between the market value and the sale price reflected investors’ concerns that the second condition of the sale, regulatory approval, might prove an obstacle. At the end of trading on Sunday, Spacecom’s market capitalization stood at only 542 million shekels.

The defense and communications ministries are the ones tasked with making the decision on the sale. Two years ago, the sale of Spacecom to the Spanish company Hispasat was called off at the last minute because of the Communications Ministry’s regulatory concerns.

This time the decision would be in the hands of a minister without portfolio, Tzachi Hanegbi. Prime Minister Benjamin Netanyahu is also communications minister, but he has been barred from dealing with matters involving Elovitch’s companies because Netanyahu and Elovitch are friends. In any case, the destruction of the satellite has changed everything.

The potential buyers are saying they are studying the significance of the events, but sources close to the deal say it will be very hard to revive the sale.

Meanwhile, the two series of Spacecom bonds that funded Amos 6 were issued before the failure of Amos 5, and just after the deal with Facebook in October 2015. The social media giant planned to use the satellite to provide its Internet.org platform to expand internet access to remote areas in Africa. It was meant to be operational for the next 16 years. Spacecom’s revenues from the project were expected to reach $95 million through 2021.

The two bond series were issued in October 2015; they attracted enormous demand and let the company raise about 1 billion shekels. On Thursday, their price fell 2%, before the official announcement of the satellite’s loss. On Sunday, the two series, Yud-Gimmel and Yud Bet, dropped 5.4% and 8.4% respectively on the Tel Aviv Stock Exchange.

The nominal value of the two bond series is 860 million shekels, and they were scheduled to mature in December 2018.

Dealing with customers

Amos 5 provided annual revenues of $40 million, and its loss in November 2015 sent Spacecom’s stock 36% lower. Several months were needed for Spacecom to receive compensation from insurance companies, which totaled $158 million. The company provided announcements to the stock exchange at every stage, which affected the prices of both its stocks and bonds.

Reports of the deal with the Chinese company sent the stock climbing two weeks ago, and even though Spacecom shares rose 50% this year before the recent losses, the stock was still 17% below its level before Amos 5 failed. Investors would appear to have even less room for optimism now.

“It will be a miracle if they get out of this,” said a source in the communications industry. “Now the customers of Amos 2 are in trouble, too, which puts the company in trouble. Even if it leases services from other firms, its profitability will be hurt.”

Pollack said his company had already begun to deal with customers who will be affected by the loss of Amos 6. He said Amos 3 was still operational and could take on a number of important customers such as the Israeli satellite broadcaster Yes, which has hundreds of thousands of antennas that cannot be moved easily to another satellite.

“Everyone who broadcasts directly to the homes of hundreds of thousands of customers we will leave on Amos 3. It can absorb them. There will be customers whom it’s easier to move to other satellites, and we’ve already begun to work on other mapping,” Pollack said.

“We have two goals for now: to achieve a minimal financial loss and preserve our good name in the market. We’re staying in the business, so we’ll think about this point and consult with customers. We have the time to do it. We have another half year at least to work in comfort and find the solutions.”

Other possibilities include buying existing satellite assets and making the necessary changes, and one company has already made such an offer, Pollack said. Also, there is excess capacity on a number of European satellites, and Spacecom could buy some of this capacity and still make a profit. Two such offers have already come in, he said.

Meanwhile, satellite manufacturers have already proposed building a new satellite quickly, Pollack said.