Hello, and welcome to the SES call with analysts and investors. My name is Jess, and I'll be your coordinator for today's event. For the duration of the call, your lines will be on listen only. However, there will be the opportunity to ask questions. This can be done by pressing star one on your telephone keypad to register your question at any time. If at any point you require assistance, please press star zero, and you will be connected to an operator. I will now hand over to your host, Richard Whiting, to begin today's call. Thank you.
Thanks, Jess. Good morning, everyone, and thanks for joining for this call regarding this morning's announcement. In a moment, Steve Collar, CEO, will present the main transaction highlights, after which we will take questions. For this, Sandeep Jalan, CFO, and John-Paul Hemingway, CSTO, are also on the line. This morning's presentation was uploaded along with the press release at ses.com, if you don't already have it, and as always from me, please note the disclaimer at the back. With that, let me hand you over to Steve.
Great. Thank you very much, Richard. Good morning, everyone. Thanks for joining at relatively short notice. I'm joining you this morning from Washington, D.C., which is extremely appropriate given that we're here to announce and discuss the exciting news that SES has entered into an agreement to acquire DRS Global Enterprise Solutions or DRS GES. This acquisition delivers for SES strategically, financially, and plays to our strengths as an extremely well-run business, serving high value and demanding end users in a segment that values high throughput, high flexibility and a multi-orbit resilient architecture. I'm gonna start on page two of the presentation, and I hope you all have access to that, and it outlines the transaction. We've agreed to pay $450 million to acquire GES from Leonardo DRS.
Of course, the deal is subject to obtaining certain regulatory approvals, which we'd expect to be completed during the second half of 2022. I've personally long admired DRS GES and have worked with them for two decades. They have a strong track record of execution and performance. They're extremely well thought of by the U.S. government in U.S. government circles, by end users, partners, and competitors, and have a culture of long-standing relationships built on the delivery of high-performance, reliable, and mission-critical connectivity solutions across the U.S. government. They really are a best-in-class solutions provider, and the combination with our own SES Government Solutions business will allow SES to serve the U.S. government with an expanded and enhanced set of advanced connectivity and network solutions, leveraging the world's largest multi-orbit satellite fleet.
Upon close of the transaction, we'll combine DRS GES with our SES Government Solutions business, and that combined business will operate under our existing proxy agreement. With an expected annual revenue of more than $250 million, the addition of GES doubles our overall revenue base of U.S. government clients at a time when demand for connectivity within the government community is growing significantly. The investment also offers attractive synergy opportunities of $25 million on a run rate basis, which we will realize over the course of three years of closing, including from capturing opportunities to support and enhance existing networks and services with our own SES fleet. On page three, you have an overview of the GES business today, and for over 20 years, GES has supported end-to-end satellite communications for land, sea, and air operations for the U.S. government.
The business is a leading government service provider with a sizable annual revenue base, long-standing relationships with many key agencies and expertise in delivering integrated satellite terrestrial solutions, notably in enterprise IT management and cybersecurity. As a key service provider, GES supports a range of agencies, including key parts of the defense and intelligence communities, and is best known for putting together multi-band solutions that meet very demanding requirements of the U.S. government, both at home and abroad. This is reflected not only in the extremely proud record of customer retention but also in the level of profitability reflected in the EUR 40 million of EBITDA having grown strongly over the past three or four years.
GES has successfully leveraged its access to services from global operators, spending some $100 million YoY on satellite capacity, only about 10% of which is provided by SES today, and where we see plenty of opportunity to support DRS GES customers leveraging our own extensive multi-orbit network. Turning to page four, and this lays out the advantages of our combined customers for bringing together GES experience in satellite communications integration, and our state-of-the-art multi-orbit satellite networking capabilities with over 60 years of combined experience in supporting mission-critical communications needs. GES's deep understanding of U.S. government customer needs across a broad suite of applications will further expand market access for O3b mPOWER, particularly in intelligence and information gathering, as well as increased theater reach back.
O3b mPOWER will be uniquely positioned in these areas, providing a compelling combination of low latency, high throughput per terminal, and high flexibility for a range of U.S. government requirements. As you know, we're developing intelligent capabilities that enable customers and end users to operate seamlessly across multiple orbits and across terrestrial solutions, where the combined SES GS and GES business will be able to leverage the arrival of O3b mPOWER to deploy really unique services and solutions to a unique base of customers that are among the most demanding of resilient multi-orbit high-performance solutions. GES and SES GS are also a strong fit culturally.
They both share values anchored in customer centricity and deep commitment to providing best-in-class service to an impressive lineup of major U.S. government agencies. Now taking a step back and looking at the significance for SES's business on page five, and you've heard me say many times that all governments are increasingly seeing space and access to multi-orbit satellite solutions as strategically important for the future defense and civil operations. We're seeing this translate into strong growth and demand for satellite-enabled connectivity to support a wide range of these applications, including intelligence, surveillance, and reconnaissance, comms on the move, Comms on the Pause, and morale, welfare, and recreation. On a pro forma basis, our overall government revenue will increase to about half a billion euros to account for more than half of our Networks business.
Out of these, U.S. government revenues will double and account for nearly 80% of our overall government revenue. Finally, on page six, this acquisition is an example of our focus on scaling our business through disciplined, value-accretive investment. As you heard already, we're scaling our business in a high-value growth segment where we have consistently demonstrated our track record of partnership and success, as evidenced by almost 30% growth delivered in our government revenue since 2017. We expect the deal to be accretive to both our earnings per share and free cash flow per share from the first day after completion, reflecting the high level of profitability from the GES business with some EUR 40 million of expected base EBITDA.
Looking beyond that, we would expect that number to grow with the expanded enhanced set of advanced connectivity and network solutions of the combined SES-GES business, leveraging the world's largest multi-orbit fleet. As well as realizing important synergies where we would expect to have captured the full $25 million of annualized synergies by the third year of completion. The transaction is fully in line with all aspects of our financial policy, being a value-accretive investment and including our continued commitment to a strong balance sheet and investment-grade ratios. That's it. Super exciting day from an SES perspective and handing back to Richard and the operator for questions.
Thanks, Steve. Jess, I think we can take our first question.
Thank you. Once again, if you would like to ask a question, please press star one on your telephone keypad and please ensure your line is unmuted locally as you will be advised when to ask your question. The first question comes from the line of Sami Kassab from BNP Paribas. Please go ahead.
Good morning, Steve. Good morning, everyone. I have three questions for Steve. The first one, can you discuss the source of the EUR 25 million synergies and provide a breakdown of revenues versus cost synergies, please? Secondly, how much of GES revenues are from non-U.S. international governments, if any? Lastly, can you elaborate on the two or three largest contracts that GES has? When are these due for renewal, and how much do they account of total revenues, please? Thank you, Steve.
Thanks, Sami. What I will do is I will take the second and third and then let Sandeep take the question on synergy. Look, in terms of how much of DRS GES' business is non-U.S. government, very little. That's one of the things that really attracts us. They're a very, very focused U.S. government service provider. They built their reputation really on being a key partner across the U.S. government and to multiple agencies. You asked to turn to your sort of other question. They have a number of different contract vehicles. They have a number of different sort of routes into government agencies. I would say they built their most successful relationship with SOCOM, with Special Operations Command, where they operate the global network for Special Operations Command.
That's obviously a key driver both of their capabilities but also their success given their relationship there. I would say it's really across the U.S. government. They deliver a lot of services for FEMA, and so it's a sort of diversified set of end users, albeit within the U.S. government environment. Sandeep, take the question on synergy, if you would.
Sami, on the synergies, we are projecting $25 million of synergies to be reached in three years' time. We believe we have been conservative in these estimates. The breakdown of the synergies is that about 60% of this comes from real pull-through synergies, as we also disclosed in this presentation. GES, they buy currently about $100 million of third-party capacities. We are by far the, you know, very small player in this. About $10 million is our current sales to this GES. There is meaningful, you know, upside potential beyond the number that we have factored into this number, which is only $15 million synergies on the pull-through.
The rest $10 million is clearly on the other elements, which is including OpEx from the business, where we see highly synergistic business. Overall, very moderate level of synergies that we are projecting from this asset and with very quick ramp-up that we would expect. Almost 50% of the synergies we would be reaching within a year of concluding the transaction.
Thank you very much, gentlemen.
Thanks, Sami.
The next question comes from the line of Nicola Gifford from Goldman Sachs. Please go ahead.
Morning, everyone. Thank you for the questions. Firstly, I wanted to ask on if you could provide any color on GES' free cash flow items below EBITDA, i.e., on their CapEx, tax or working capital. Secondly, is there scope for any further acquisitions sort of similar to the one that you announced today going forward? Thank you.
Sandeep, why don't you take this?
This asset we have announced that the EBITDA expected is about $40 million. In fact, below EBITDA, there are very few cost items. There is not any high level of CapEx. CapEx is very low. It's in low single-digit millions. There is a very high level of cash conversion of this EBITDA, so very highly free cash flow generative. From working capital engagement as well, there is not any large movements, any meaningful ones. Regarding the tax, there would not be any significant step up in our tax guidance, and we will come back around the closing time of this transaction about the overall impact on our ETR, where we have given a guidance earlier. It remains in 10%-15%. It may go with this transaction towards the top end of that guidance.
That's where we currently sit. Overall, a very cash generative transaction from day one and on top, synergy further ramping up this cash generation much more.
Yeah, look on the question, Nicola, of you know any other kind of opportunities or how do we see this. I would say we've been you know targeting this acquisition for a little while now. As I said, that we're sort of, as a business, admirers of DRS GES and what they've created. I think you can see both in the financial fit and the strategic fit why. As always when it comes to M&A and sort of inorganic growth, we're gonna sort of look at the fundamentals of the business, how well does that business fit with what we're doing at SES and be super financially disciplined around it.
It's really a business that we were pretty excited about from the first moment that we got kind of seriously engaged and very, very happy and sort of excited that we've been successful. I would say, you know, we will continue to you know, back that up in terms of our approach to, you know, M&A and inorganic growth. Thanks, Nicola.
Thanks. Super clear.
The next question comes from the line of Aleksander Peterc from Societe Generale. Please go ahead.
Yes, good morning and thanks for taking my question. I just have a very small update on what point in time do you expect to reach the full synergies? That's number one. Number two, from your earlier comments, do I understand it well that most of the EBITDA minus the very small CapEx flows into the free cash flow generation of the business you're acquiring? A third one, if you could just tell us whether the current geopolitical context led to maybe a little bit more tense negotiations on price, or did that not play any role, because you saw the value of defense assets going up quite a lot by about 50%-80% across European assets over the past couple of weeks.
If you could just clarify that for us. Thanks a lot.
Yeah, thanks.
Thanks, Aleksander.
I'll take the third. The answer is no on point three. It really had no bearing whatsoever. I think our strategic view was formed well before the last two to three weeks, and we've been in discussions sort of around this topic for a good while now. No role in terms of the discussion, negotiation or indeed the strategic fit. Sandeep, do you wanna pick up the other ones?
On the synergies, as we said earlier, Aleksander, we expect $25 million of run rate synergies, and we expect to reach this level within three years' time. We have been pretty conservative, as I was explaining earlier, the pull-through part, where we are currently at about $10 million, and we will ramp up to $15 million. That is part of our synergies projection. Once again, on the synergies, we expect to be halfway through this $25 million of synergies within a year of having closed the transaction. On your second question, yes, we do expect this EBITDA to be mostly converted into cash flow from operations because the level of CapEx and working capital movements below EBITDA is pretty small, right?
Traditionally, the cash flow from operations from this business has been at the level of about 90% of the EBITDA. Pretty free cash flow accretive from day one, and plus synergies further ramping up the level of absolute EBITDA and free cash flow generation from the business.
Very clear. Thank you very much.
The next question comes from the line of Nick Dempsey from Barclays. Please go ahead.
Yeah. Good morning, guys. I've got two left. First one, always when an integrator is bought by someone who's providing capacity, in this case, you have a question about the independence of that business in the minds of the customer. How are you gonna sort of balance to persuade at least your customers that you'll be balancing their needs successfully with your desire to sell more SES capacity? Second question, can you give us an idea of who the key competitors are for this business, just the top couple?
When you say, Nick, competitors, you mean, which businesses compete with DRS GES today, or?
Exactly, yeah.
Just wanna make sure I get your question right. Yeah. Okay.
Yeah. Other large integrators for U.S. government. Yeah.
Got it. Listen, what I would propose in to answer those questions, Nick, if it's okay with you, is I'll hand over to JP. JP has been really super close to this for the entire time that we've been engaged with DRS GES. He'll be able to give you a good sense for, you know, how end users of GES will be thinking about this. JP, why don't you take that if that works for you?
Absolutely. Nick, I think you on your first question, you used the exact right word, which is the right balance. What GES have done a very good job of is getting really close to their customers with a very trusted relationship, and they trust them to go and find the very best network solutions. But as Sandeep said, we are, you know, underrepresented in, given that we are, you know, the world's largest satellite provider and only have sort of 10% of their satellite business means that we are underrepresented in their sort of overall architecture. There is certainly room to shift that balance, and move us higher up the order in terms of the best use of the best assets.
I think it's fair to say that to date, GES don't have the best of the best of SES's fleet. Obviously what this move does, it gives them, you know, privileged access to the very best of our assets on a global basis. That will be good for their customers. They'll get the best of the best of SES and continue to get, you know, third-party capacity as they would need to and as we do with SES GS today, and balance that quite correctly. Obviously the bigger point is the future, and them getting access to the very best of O3b mPOWER, which is something that their customers will get massive benefit from.
We see this as a good balance, but a balance that we are, you know, significantly underrepresented in today in terms of that independence to bring their customers the best network. In terms of key competitors, really in terms of some of the contracts they own, that they really have had them for a number of years. They are very, very solid with the SOCOM contract, with the Army and WCN, INDOPACOM and others, which is really synergistic with us because we don't have those contracts. We actually have very strong relationships with others. There are some independent service providers, such as formerly known as UltiSat and the Speedcast, partners such as Peraton and these things, but they're not always just competitors. They are quite often partners with GES and indeed partners with ours. It's a relatively complex ecosystem.
I would say that DRS GES are massively positively viewed by all of those. They work with ourselves, they work with Inmarsat, they work with Intelsat, sometimes competing, sometimes as fantastic partners. I think it's a complex ecosystem, but they are very strong in the contracts that they have today.
Thanks, guys.
Thanks, Nick.
The next question comes from the line of Terence Tsui from Morgan Stanley. Please go ahead.
Oh, thanks very much. Good morning, everyone. Just two quick questions left from my side. Picking up on the comments to the previous answer, just wondered if you can elaborate a bit more on the $100 million of annual spend on satellite capacity by GES. Just interested to get an understanding about what is the typical contract length, and you know, how long it could take potentially for SES to win more business on the capacity front. Secondly and lastly, perhaps you can just elaborate a bit more on the regulatory clearing process. What hurdles do you need to clear, please? Thank you.
Yeah. Look, I guess, on the first question, what I would say is, the answer is it really depends. The contracting structures of the U.S. government are typically sort of five-year deals overall, but are essentially renewed on an annual basis. Depending on how the contract works, sometimes that will allow the provider to sort of exchange solutions within the overall contract. In other words, sort of swap out certain bandwidth and certain services, and some don't. It's really an it depends question.
What I would say is, reflecting what JP said, is our strategy and our approach here is going to match exactly with DRS GES's existing approach, which is best in class solution for the end customer, best in class solution for the end user, making sure that that's the number one priority. With the confidence that obviously with the largest fleet and now with full access to medium earth orbit, you know, SES's fleet and capabilities is gonna be extremely attractive to the end users that GES currently serves and will serve in the future.
We think there's every opportunity for us to capture, you know, more share of the satellite capacity while still staying true to, you know, to the fundamentals that have made DRS GES successful over the last, you know, couple of decades. I think on the regulatory approvals, it's sort of customary approvals. We've got an existing U.S. government proxy entity, and so that certainly helps. We're very sort of similar in terms of structure to Leonardo DRS and the way that is sort of structured within their business today. We think that those approvals will take us, you know, around 6 months, and we think that we'll be done by the second half of this year.
Great. Thanks, Steve.
Great. Thanks a lot, Terence.
The next question comes from the line of Roshan Ranjit from Deutsche Bank. Please go ahead.
Good morning, everyone. Thank you for the questions. Just two quick ones from me, please. Thinking slightly ahead, I guess, and looking at your group guidance, now you had guided to prior to this deal a return to growth in FY 2023. You know, depending upon the ramp up and the integration. Now, is there scope to kind of narrow the low- to mid-single-digit average growth guidance you've given over the midterm? Secondly, Steve, just following up on something the previous comments you gave. You know, when we think about the O3b mPOWER backlog, and clearly that doesn't include any kind of government commitments at present.
In your kind of discussions that you've had, I guess how easy is it kind of to pull through the kind of current contracts that GES have into that multi-orbit proposition that, you know, you guys are able to offer? What, if any, is their kind of current overlap? I guess a bit of a high level question there, but any details you can give there would be very helpful. Thank you.
Yeah. I think on guidance and happy for Sandy to jump in, but we'll sort of cover that in a broader update. I mean, this is sort of specifically around this acquisition, and then we'll cover probably with our Q1 results any sort of updates that we would give there. Obviously the two are sort of stand alone, if you like, our current business and then adding the GES business ultimately when that closes and we'll sort of talk you through the implications of that on our next call. In terms of sort of. Yes, you're right in what you say. There's no government backlog in O3b mPOWER, and that's one of the things which excites me about this transaction.
It's not so much pulling through existing contracts, but it's definitely presenting solutions to existing end users that I think will be extremely interested in the kind of capabilities that O3b mPOWER offers and the sort of multi-orbit architecture that we have offers. It won't just be sort of integrating that multi-orbit architecture within our own fleet and capabilities. It also offers us the capability to kind of expand and put together hybrid solutions that include both MEO and GEO, and in some cases our own GEO, and in some cases other people's GEO. It's exactly the reason that we've developed, you know, Adaptive Resource Control. We developed this kind of multi-orbit approach.
The government, the U.S. government in particular, is one of the most demanding when it comes to resilience, when it comes to multiple solutions, when it comes to being connected to both, for example, MEO and GEO simultaneously. These are all things that we'll be able to bring and leverage and take to the end users and the current customers of DRS GES. Not so much about pulling through existing contracts or contract vehicles, but definitely leveraging the relationships that already exist within GES business and sort of bringing a solution set that I think is really, really well matched to this community of end users.
Great. That's helpful. Thank you.
Thanks, Roshan.
The next question comes from the line of Carl Murdock-Smith from Berenberg. Please go ahead.
Hi. Thanks for the call today, guys. You've answered most of my questions, but just one last one. You've obviously got a huge respect for the depth of relationships that GES has built with its customers over the years. With that in mind, can you just talk slightly to what you're doing with regards to retention of key employees? Thank you.
Yeah, it's a great question. Obviously something that's sort of top of mind. I think the relationship is that GES has built with their customers is part people, it's part culture and it's part capability. We're very, as you say, both respectful, admiring and very focused on protecting and defending all of those things. Carl, it's a great question. We have sort of retention mechanisms in place. But as importantly, it's sort of reassuring all concerned, including end users and customers of GES that you know, things only get better from here on, right? That this is a very good thing for GES' customers and end users, a very good thing for the employees of the business. This is a growth-oriented business.
The same thing is true for our SES GS business. This is really a kind of, you know, win-win across the board. To your point, retaining key talent across our organization and including certainly the DRS GES employees has always been through these discussions at the very top of our, you know, list of priorities.
That's great. Thank you.
Thanks, Carl.
There are no further questions in the queue, so I will hand the call back to your host for some closing remarks.
Thanks, Michelle. Thanks, everyone. [crosstalk]
Listen, I'll jump back in and.
Go ahead, Steve. Yeah, go ahead. [crosstalk]
Oh, sorry, Richard. A bit of a delay on my line, I think. Look, yeah, just to say, I'm sure you've sort of picked up, we're really excited by this. This has been a business that, as I said, we've long admired. We love the team, we love the customer base, and we're super excited about the future of DRS GES combined with our SES GS business. I really think it's important, I would say transformational for our networks business and with a view to the capabilities that we're bringing with O3b mPOWER. With that, thanks very much for joining. Thanks for joining at short notice, and we look forward to talking to you with our Q1 results. Thanks, all.
Thanks very much. Bye-bye.
Thank you for joining today's call. You may now disconnect your lines.