By Dominique Vidalon and Mathieu Rosemain
PARIS (Reuters) -French satellite company Eutelsat said it was in talks over a possible all-share merger with British rival OneWeb, which could help both companies challenge the likes of Elon Musk-owned SpaceX's Starlink and Amazon.com (NASDAQ:AMZN)'s Project Kuiper.
Eutelsat's statement on Monday came after two sources close to the negotiations told Reuters at the weekend it was poised to buy OneWeb, which was valued at $3.4 billion in its most recent funding round and in which Eutelsat already has a 23% stake.
"Following recent market rumours, Eutelsat Communications (OTC:EUTLF) confirms that it has engaged in discussions with its co-shareholders in OneWeb regarding a potential all-share combination to create a global leader in connectivity," Eutelsat said. OneWeb declined to comment.
Eutelsat shares fell 17% to 8.65 euros by 0845 GMT.
"Investors don’t appreciate the uncertainty, and if ETL (Eutelsat) is in a merger of equals with OneWeb, then ETL investors get a share in a new entity where the other half is pretty much an unknown to them ... So I understand why ETL shares are down on the news," said one trader in London.
The talks are centred on a transaction that would result in Eutelsat and OneWeb shareholders each holding 50% of the new, combined entity. There were no assurances that the talks would result in any final agreement, Eutelsat said.
POLITICALLY SENSITIVE
A deal would strengthen both companies in the race to build a constellation of low-orbit satellites. But a tie-up would be politically sensitive, as it would bring together Indian billionaire Sunil Bharti Mittal, along with France, China and Britain as shareholders of the combined group.
"From an anti-trust point of view, this deal is likely to be scrutinised heavily and will also likely need political consensus from both the UK and EU at a time when the UK is choosing a new Prime Minister," Credit Suisse said in a note.
Eutelsat estimated the "satellite connectivity" market to be worth around $16 billion by 2030.
Demand for satellite launches is expected to accelerate after recent sanctions have sidelined the Russian space launch industry, and giant satellite constellations could offer a new channel to beam broadband Internet from space.
Eutelsat's biggest shareholder is France's state-owned investment bank Bpifrance, with a 20% stake. Its fourth-largest shareholder is China's sovereign fund China Investment Corp, according to Refinitiv data.
OneWeb was rescued from bankruptcy by the British government and India's Bharti Global. A merger would leave the British government with a minority stake in the merged business, one source close to the matter said.
Britain would retain special rights over OneWeb after the deal, another source said, including a veto over sales to clients deemed risky for security reasons, and a veto over a change in the location of its headquarters.
These special rights would also entail a veto over business relations that may compromise the so-called "Five Eyes" intelligence alliance, comprising Australia, Canada, New Zealand, Britain and the United States, and a say on the supply chain and launch decisions.