EchoStar Expects to ‘Resolve’ FCC Inquiries With $19B S-Band Spectrum Sale to SpaceX; RemainCo Leveraging ‘Cloud-Native 5G Core’ to Add Starlink Direct-to-Cell Access

 

EchoStar and SpaceX this morning announced an approximately $19 billion deal in which SpaceX will acquire EchoStar’s strategic global S-band direct-to-device spectrum-related holdings.

A summary of the transaction consideration, assuming that EchoStar relies on SpaceX to fully address its topco spectrum secured notes, according to the terms of the deal, is shown below. EchoStar may choose to increase its receipt of SpaceX stock by paying off some of its topco spectrum-secured notes with cash on hand.

 

EchoStar said it anticipates that today’s transaction along with its AT&T spectrum sale announced on Aug. 26 “will resolve the Federal Communications Commission’s (FCC) inquiries.”

The $19 billion purchase price slightly exceeds Octus’ July 31 AWS-4-discounted base case sum-of-the-parts valuation estimate of $17.6 billion for these specific licenses. Our sum-of-the-parts valuation discounted the 3GPP band 66 AWS-4 spectrum block to $1 per MHz-POP to reflect hypothetical new mobile satellite service, or MSS, usage requirements while estimating an $89 per share value for EchoStar’s equity.

EchoStar, SpaceX and a separate trust company to effectuate the debt service and other matters until closing entered into a license purchase agreement, or LPA, under which SpaceX will purchase EchoStar’s:
 

• AWS-4 spectrum licenses: 2000-2020 MHz (downlink) and 2180-2200 MHz (downlink);
   
• H-block spectrum licenses: 1915-1920 MHz (uplink) and 1995-2000 MHz (downlink); and
   
• “[C]ertain international authorizations, filings, concessions, licenses, rights and priorities related to that spectrum and certain assets associated therewith.”
   

In addition, the LPA provides for EchoStar and SpaceX’s entry into long-term commercial agreements “that will enable EchoStar to offer its Mobile subscribers access to [SpaceX’s] next-generation Starlink Direct to Cell text and voice and broadband services utilizing certain rights and licenses related to the Spectrum that are to be conveyed by [EchoStar] to [SpaceX] at the Spectrum Acquisition Closing.” EchoStar notes that this offering to its subscribers will leverage the company’s “cloud-native 5G core.”

The commercial agreements will also provide for a fee-based referral program under which EchoStar refers existing HughesNet customers to SpaceX, which we interpret as a potential source of payments to the Hughes Satellite Systems Corp. credit box.

EchoStar’s spectrum license portfolio after the SpaceX and AT&T transactions is shown below. In our view, the AWS-3 licenses could fetch a price closer to $10 billion amid interest from multiple bidders and Verizon potentially seeking to address its relative midband spectrum deficiency.
 

$19B Price Tag Provides for $17B in Topco Debt Paydown, SpaceX Stock; $2B in Debt Service

Under the transaction, $17 billion of total consideration will be payable at the transaction closing, a portion of which, defined as the “Total Payoff Consideration Amount,” will be used to:
 

• Fully pay all outstanding amounts owed on EchoStar topco’s 10.75% senior spectrum secured due 2029 and its 6.75% senior spectrum secured notes due 2030; and
   
• Settle the anticipated redemption and conversions of EchoStar topco’s 3.875% convertible senior secured notes due 2030.
   

The remaining total consideration amount after paying off the topco notes, defined as the “Purchase Price,” will be paid by SpaceX to EchoStar as follows:
 

• Up to $8.5 billion will be paid in SpaceX class A common stock, valued at $212 per share; and
   
• Any amount of the “Purchase Price” exceeding $8.5 billion will be paid in cash.
   

If the amount to address the EchoStar topco notes exceeds $8.5 billion, EchoStar may elect to pay the excess in cash, its Class A common stock (with respect to the convertible notes), or both, to maintain its receipt of the full amount of SpaceX equity. However, if EchoStar elects not to pay in cash such excess amount, SpaceX will be responsible for the payment, and the SpaceX equity payment will be reduced dollar-for-dollar to ensure that the combined SpaceX equity payment and amount to address the EchoStar topco notes does not exceed $17 billion.

The transaction closing is expected to occur on or about Nov. 30, 2027, after the expiration of the make whole period for the EchoStar topco notes and the date on which the convertible notes become eligible for redemption, according to EchoStar.

If SpaceX elects to proceed with the closing of the transaction before Nov. 30, 2027, SpaceX will be responsible for any additional amounts required to satisfy the EchoStar topco notes, other than additional amounts payable as a result of a default under the notes.

Approximately $2B Debt Service Payments Through Nov. 30, 2027

Additionally, in connection with the LPA and the transactions, on Sept. 7, SpaceX and a Nevada business trust, Spectrum Business Trust 2025-1, entered into a credit agreement, pursuant to which SpaceX has agreed to loan to the trust (via automatically cancellable loans) amounts sufficient to make debt service payments on the EchoStar spectrum secured spectrum notes through at least Nov. 30, 2027, which will be secured on a junior lien basis by the licenses. The aggregate amount of payments for the interim debt service through Nov. 30, 2027, will equal approximately $2 billion.

Two-Step Closing Process

Under the SpaceX transaction, the transfer of the spectrum licenses will occur in two steps:
 

• First, the licenses will be transferred by EchoStar to the trust; and
   
• Second, the licenses will be transferred by the trust to SpaceX upon final closing.
   

The international authorizations, filings, concessions, licenses, rights and priorities will be transferred directly to SpaceX at the final closing, to the extent that the required regulatory approvals have been obtained by such date; provided, however, that the failure to obtain such approvals will not delay or prevent the final closing.

Convertible Notes Indenture to Be Amended for Transaction

On Sept. 7, EchoStar entered into a support agreement with holders of a majority of the outstanding principal amount of its convertible notes under which holders consented to an amendment of the asset sale covenant under the notes’ indenture to expressly permit the SpaceX transactions, subject to the cash proceeds of the transactions being used to redeem in full the 10.75% spectrum secured notes and the 6.75% spectrum secured notes. EchoStar said it expects to enter into a supplemental indenture to the convertible notes indenture to effect such amendments on or before Sept. 30.