An Airbus-TAS Space Merger: good, bad, or none of the above?

Press leaks on M&A discussions typically aren’t helpful (remember EchoStar’s attempt at buying Inmarsat?), but there was probably no good way to hide the fact that Airbus and Thales Alenia Space (TAS) are in early discussions about a potential merger of their space businesses. Both companies’ satellite manufacturing business have been underwater from signing deals for unexpectedly difficult-to-build nextgen satellites. Both companies are also grappling with a ~50% decline in the demand for commercial GEO satellites (the traditional lifeblood of the industry).

A tie-up between Europe's two largest space companies would recast the competitive dynamic internally within Europe and externally between Europe and the rest of the world. While it’s too early to say whether the merger will happen, Quilty Space considers the following possibilities if the talks prove true.

Pros:

A buffer against a turbulent market. Airbus and TAS are Europe’s two largest space companies by pretty much any metric, and while both have won high-profile international deals, they have struggled to deal with market shifts. Single-digit GEO satellite orders are now the norm, and LEO constellation orders are rare and highly competitive. A combined company could fare better than two fighting over a lumpier, less predictable customer set.

Scale and consolidation. Each company brings unique capabilities to the merger (e.g., Airbus’ EO business), but there remains a significant amount of overlap. Airbus and TAS have space facilities spread across much of Western Europe. Both have sites in the UK, France, Spain, Italy and Germany. Some of these sites are undoubtedly to meet the European Space Agency’s geo-return policy, giving each company access to more funding but at the cost of a bloated footprint. This presents a meaningful opportunity for consolidation and related cost savings.

Cons:

Loss of domestic competition. Absent the success of small to medium enterprises, Europe’s space landscape would lose its most significant continental competitive dynamic. Airbus+TAS against the world could be stronger together, but will Airbus+TAS lose pricing power with only one provider of national satellite programs? If the past serves as prologue, the formation of ULA from the combination of Boeing and Lockheed’s launch businesses in 2005 led to a “Nunn-McCurdy certification” breach within six years when the cost of military launches rose 58% above the 2007 baseline.

No near-term relief. An apparent motive for the Airbus-TAS merger talks is both companies trying to offset cost overruns, particularly software-defined satellites (OneSat at Airbus, Inspire at Thales). Nowhere has it been clarified how a merger would resolve the engineering dilemmas that are creating those cost overruns. Is this a short-term solution to a long-term problem?

TBD:

While a combined Airbus-TAS Space would be a formidable competitor, the tie-up could make room for smaller but growing players like Aerospacelab in Belgium, OHB in Germany, and Sitael in Italy. The European Space Agency and other institutional customers will want to see more competition. Absent a choice between titans, would ESA throw more capital to emerging companies?

Not all of Airbus and TAS’s space capabilities overlap. How would a merger consider Airbus’ expertise in launch via ArianeGroup, or TAS’s strength in building space station and cargo modules?

SOURCE: https://www.reuters.com/business/aerospace-defense/airbus-looking-opportunities-create-scale-space-satellites-2024-07-21/