Oaktree Sends Letter to Inmarsat PLC Board of Directors Regarding Takeover Offer
Funds and accounts managed by Oaktree Capital Management, L.P. (collectively, “Oaktree”), a 2.85% shareholder in Inmarsat PLC (“Inmarsat”), sent a letter to the Inmarsat Board of Directors on November 5, 2019.
In its letter, Oaktree urges the Inmarsat Board to postpone the Court Sanction Hearing, currently scheduled for November 12th, in order to allow the U.S. regulatory approval process for Inmarsat’s valuable Ligado spectrum assets to conclude. Alternatively, Oaktree asks the Board to negotiate for contingent value rights or another mechanism that will allow shareholders to participate in the significant potential value of Ligado’s spectrum assets. Oaktree believes the Takeover Offer that the Board of Inmarsat recommended to shareholders earlier this year ascribes no value to these crucial spectrum assets and the associated lease for use in developing a 5G network, which in light of recent developments may be approved by the FCC in the near term.
The full text of the letter is as follows:
November 5, 2019
Andrew Sukawaty, Chairman of Inmarsat PLC
Sir Bryan Carsberg, Non Independent, Non-Executive Director
Janice Obuchowski, Independent Non-Executive Director
Dr. Abraham Peled, Senior Independent Non-Executive Director
Simon Bax, Independent Non-Executive Director
Gen C. Robert Kehler, Independent Non-Executive Director
Robert Ruijter, Independent Non-Executive Director
Dr. Hamadoun Toure, Independent Non-Executive Director
Phillipa McCrostie, Independent Non-Executive Director
Warren Finegold, Independent Non-Executive Director
Tracy Clarke, Independent Non-Executive Director
Rupert Pearce, Chief Executive Officer, Executive Director
Tony Bates, Chief Financial Officer, Executive Director
Alison Horrocks, Chief Corporate Affairs Officer and Company Secretary
99 City Road
London EC1Y 1AX
With a copy to:
Mr. Jim Murray, PJT Partners
Dear Board of Directors,
As you know, funds and accounts managed by Oaktree Capital Management, L.P. (“Oaktree”) have been significant shareholders of Inmarsat (the “Company”) since before the announcement of the takeover offer by Connect Bidco Limited, which is controlled by Apax Partners LLP, Canada Pension Plan Investment Board, Ontario Teachers’ Pension Plan and Warburg Pincus International LLC (collectively, the “Consortium”). The takeover offer is being made pursuant to a Scheme of Arrangement under Part 26 of the Companies Act 2006 (the “Takeover Offer” or the “Scheme”). Today Oaktree owns 13,232,143 shares, or 2.85% of the Company.
We write to follow-up on our previous communications. We would have liked to discuss these matters further in a private meeting with you, and believe we could have managed any restrictions related to the Takeover Code that you cited as a reason for not meeting. But, as you have decided to reject private engagement, we are making a public statement on these matters in accordance with best practice under UK stewardship guidance.
Below, we discuss the following:
- The background of our discussions to date
- Our understanding of the current state of affairs for Ligado
- Our view of the true valuation of Ligado
- Our concerns related to the lack of disclosure in the Scheme documents
- Our concerns relating to material change of circumstances
- Our request in light of the material change of circumstances relating to Ligado
Background of our Discussions to Date
As you are aware, we voted against the Scheme at the shareholder and court meetings held on May 10, 2019. In May 2019, ahead of the shareholder vote on the Scheme, we held calls with both UBS, as advisor to the Consortium, and Mr. Rupert Pearce, your CEO, to make them aware of our views on the Takeover Offer. We believed then, as we believe now, that the Takeover Offer significantly undervalued the base business excluding Ligado and we drew attention to this fact at that time.
In our calls with UBS and Mr. Pearce ahead of the shareholder vote, we stressed that the Takeover Offer essentially assigned negative value to the Company’s L-band spectrum assets or the contract with Ligado for a long-term lease of that spectrum with a remaining life of 89 years (the “Ligado Lease”). We also expressed our view that the scheme document for the Takeover Offer was severely lacking in disclosure concerning the Ligado Lease or any value appurtenant to it.
As set out below, we believe that the significance of the Ligado Lease and the likelihood of value crystallization have only (and materially) increased since that date.
On October 7, 2019 and again on October 29, 2019 we asked the Board about its intentions in respect of the Scheme in light of current and potential future developments related to the Ligado Lease. To our disappointment, the Board chose not to engage with us. We fail to see why the Board would not seek to adjourn the date for the Court Sanction Hearing (the “Hearing”) in respect of the Takeover Offer. The Hearing is now scheduled to take place only shortly before we are likely to learn of the FCC’s decision, at a time when progress is being made toward that decision.
We are advised that the FCC will likely take a decision to approve the license modifications requested by Ligado (“Ligado Approval”) in the near future.
On April 18, 2019, the FCC made a Notice of Proposed Rulemaking to reallocate the 1675-1680 MHz band for shared use including commercial fixed or mobile operations (the “NOAA NPRM”). The spectrum subject to reallocation under the NOAA NPRM could only be of true commercial value to an entity that also controlled the Ligado spectrum that sits adjacent at 1670-1675 MHz. Concurrent with the release of the NOAA NPRM, FCC Commissioner Carr said in a press release, “The 5 MHz before us is a small sliver of spectrum to be sure. But if it’s combined with adjacent and nearby channels, we could have a 40 MHz block that offers high-throughput at great distance.” 1 The 40 MHz he refers to is the aggregated Ligado network, which is comprised of valuable mid-band spectrum that exhibits attractive propagation characteristics. We believe that the NOAA NPRM was material and directional information and that it demonstrated, at the least, the FCC’s probable intent to address the question of Ligado Approval.
On September 3, 2019, the National Telecommunications and Information Administration (“NTIA”), a division of the United States Department of Commerce, released its first annual report dated August 2019 regarding efforts to repurpose the nation’s radiofrequency spectrum. This report was required pursuant to a Presidential Memorandum issued on October 25, 2018 aimed at developing spectrum strategy for the United States. In its first annual report, the NTIA addressed a number of spectrum bands, including the L-band at 1526-1536 MHz, 1627.5-1637.5 MHz, and 1646.5-1656.5 MHz, namely the Ligado spectrum. In discussing the Ligado spectrum, the NTIA notes some of the history of the L-band and the Ligado amendment. Importantly, the NTIA concludes with a description of the “Next Steps” in which they note, “The FCC will issue a determination on the applicant’s pending modification applications.” 2
We consider that the NTIA spectrum report was an important change because up to that point, it was the belief of market participants that the FCC was awaiting a recommendation from the NTIA. We believe that this was a material change in circumstances for the Company.
Further progress was made when, on October 24, 2019, the FCC sent a draft order approving the Ligado license modification to the Interdepartmental Radio Advisory Committee (“IRAC”). The IRAC is overseen by members of the NTIA. Pursuant to an agreement with the FCC, the IRAC has fifteen business days to respond to a filing from the FCC, after which the FCC is free to act unilaterally.3
The Potential Value of Ligado Lease
On August 2, 2018, CEO, Mr. Pearce said on an earnings call “… if Ligado recover their FCC license and subsequently reactivate their business plan… our contract would continue to run into the long-term providing us with substantial incremental value.”
We could not agree more.
Upon the Ligado Approval, which we now believe to be imminent, over $167 million will become immediately due and payable to the Company ($35 million of past deferrals and the deferred 2019 payment of $132.3 million, plus interest on both). In addition, Ligado will be obligated to pay $136 million in 2020, and annual lease payments thereafter subject to 3% annual inflation. These payments will continue for 89 years.4 One need only calculate the discounted cash flows of this stream to arrive at a valuation of the Ligado Lease.
Takeover Materials Lack Adequate Disclosure
The public announcement of the Takeover Offer on March 25, 2019 did not mention Ligado. The Scheme documentation and other associated documentation make no reference to the circumstances of the Ligado Lease.
As the Company knows, a Scheme document should contain a discussion of all material items for shareholder consideration. But this 100-page document does not mention the Ligado Lease, its potential for value, nor the circumstance of the 18th April 2019 NOAA NPRM which was indicative of FCC interest in progressing the Ligado Approval.
The annual reports for 2017 and 2018, incorporated by reference in the Scheme documents, contain more mentions of Ligado, but the documents contain no material discussion of the Ligado Lease other than to note the deferred payment amounts and that “the timing [of FCC approval]… remain[ed] uncertain.”
And the Scheme documents themselves only contain two brief mentions of Ligado, both of which simply note that the financials presented to shareholders are meant to exclude any revenues or expenses under the Ligado Lease.
We consider this to be clearly inadequate.
Material Change of Circumstance
We believe that the movement of the FCC towards granting approval of the Ligado Lease in August/September and October 2019, as set out above, are material circumstances relevant to shareholders in respect of the Scheme. They have arisen after the date of the shareholder vote. The Company has not communicated with, or notified shareholders, of these developments.
The Company is required both as a matter of the UK continuous disclosure regime, and the Takeover Code, to update shareholders on material developments and material changes.
Our Request in Light of the Material Change Relating to Ligado
We believe there has been a material change with respect to Ligado, which means that there is a very real possibility of a significant increase in the value to the Company in the near term. The circumstances of the Ligado Lease and the possibility of FCC approval was not addressed in the Scheme documents at all. The actions of the FCC in moving towards approval of the Ligado Lease have not been communicated to shareholders since the shareholder vote. We believe that this is inappropriate.
In light of the above we believe that the Court will want to examine these issues very carefully in its consideration of whether or not to appove the Scheme at the Hearing unless either:
- there is a further shareholder vote following the circulation to shareholders of full particulars of the Ligado Lease and its prospects; or
- the materiality of the Ligado Lease is removed from the operation of the Scheme by ensuring that any value associated with it benefits the shareholders and not the bidder.
Under these circumstances, we request the Board to delay the Hearing until early December to allow for the possibility of the FCC approving the Ligado Lease. There is sufficient time before the December 10th, 2019 longstop date in respect of the Takeover Offer to allow for this.
In the meantime, we believe the Board should negotiate with the Consortium for a contingent value right (“CVR”) or other similar mechanism to allow shareholders to participate in the upside of the Ligado Lease should FCC approval be obtained whether before or after the effective date of the scheme.
We would invite other shareholders to approach the Board on a similar basis.
If the Board chooses neither path, we currently intend to appear at the Hearing. In that event, we will invite the Court to examine these issues very carefully in its consideration of whether or not to approve the Scheme unless either a suitable CVR or other mechanism to allow shareholders to participate in the upside of Ligado is put in place or there is a further shareholder vote on the Scheme.
Additionally, with regard to the Company’s continuing disclosure obligations and the Board’s fiduciary duties, we would expect that you would make your views known to all shareholders. This is an important moment for the Takeover Offer and we believe that updating shareholders on the following subjects would enhance shareholders’ ability to make an informed judgement:
- Your understanding of the status of the Ligado Approval;
- Your views regarding any material change or otherwise to the value of the Company today; and
- On any steps that you intend to take in regards of the material change in relation to the Takeover Offer and the Hearing.
Please acknowledge receipt of this letter and provide confirmation that it has been shared with the full Board.
/s/ Steven V. Tesoriere
Steven V. Tesoriere
Co-Portfolio Manager, Value Opportunities Fund
Oaktree Capital Management, L.P.
Oaktree is a global alternative asset manager with a diversified mix of opportunistic, value-oriented and risk-controlled investments across credit and other investment offerings. In 2019, Brookfield acquired a majority interest in Oaktree, and it continues to operate as a standalone business. The two firms share fundamental values and an approach to investing that is long-term, value-driven and contrarian, with a focus on the downside protection of capital. Together, Brookfield and Oaktree have over $500 billion of assets under management and provide investors with one of the most comprehensive offerings of alternative investment products available today. For additional information, please visit Oaktree's website at http://www.oaktreecapital.com/.
1 In the Matter of Allocation and Service Rules for the 1675–1680 MHz Band. (2019, May 13). Retrieved November 4, 2019, from https://docs.fcc.gov/public/attachments/FCC-19-43A3.pdf.
2 Annual Report on the Status of Spectrum Repurposing. (2019, September 3). Retrieved November 4, 2019, from https://www.ntia.gov/files/ntia/publications/spectrum_repurposing_report_august_2019.pdf
3 Memorandum Of Understanding Between The Federal Communications Commission And The National Telecommunications And Information Administration. (2003, January 31). Retrieved November 4, 2019, from https://www.ntia.gov/files/ntia/publications/fccntiamou_01312003.pdf.
4 Inmarsat Annual Report and Accounts 2018 . (2019, September 14). Retrieved November 4, 2019, from https://investors.inmarsat.com/wp-content/uploads/2019/09/14.-Inmarsat-plc-Annual-Report-and-Accounts-2018.pdf.
Oaktree Capital Group, LLC
+1 (212) 284 1953
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