Hedge Fund Bets on SES Defense Push, Eyes Spectrum Windfall and MEO Strategy

Hedge fund manager Davide Leone has increased his stake in satellite firm SES SA, betting on the company's strategic shift toward defense contracts. The London-based fund now owns more than 5% of the Luxembourg-based firm. Leone argues that SES is undervalued and could become a cheaper European defense stock alternative according to Bloomberg.

The satellite firm recently reported earnings that fell short of expectations, causing a 21% drop in its stock price since November 6. Despite the near-term setback, shares have still risen 65% this year after SES acquired Intelsat. The firm also announced plans to develop a next-generation medium-Earth orbit network with K2 according to Bloomberg.

Leone sees long-term value in SES as it pivots away from traditional media customers and into defense and government satellite spending. He believes the company's strategic partnership with K2, which offers slower but reliable medium-Earth orbit connections, could outperform SpaceX's low-Earth orbit network according to Bloomberg. Additionally, SES is positioned to benefit from a potential multi-billion-dollar windfall if it sells its spectrum licenses in the U.S. to accelerate reallocation according to Bloomberg.

Why the Defense Pivot Matters

SES's shift toward defense could position it as a European alternative to U.S. satellite firms like SpaceX. This pivot reflects broader market trends where governments increasingly seek independent satellite infrastructure according to Bloomberg. By targeting government contracts, SES is diversifying its revenue streams amid stagnant demand from traditional media clients according to Bloomberg.

The company recently signed a strategic agreement with K2 to develop a next-generation medium-Earth orbit network. MEO satellites, while slower than low-Earth orbit satellites, can offer advantages such as greater coverage and signal reliability according to Bloomberg. This move could help SES secure contracts with defense and intelligence agencies seeking robust satellite infrastructure.

What Investors Are Watching

In the U.S., SES's potential windfall from the sale of its spectrum licenses is a near-term opportunity. A Federal Communications Commission document released in late October outlined a process similar to a 2020 auction, which could allow SES to be compensated for helping reallocation according to Bloomberg. A decision is expected at an FCC meeting on November 20 according to Bloomberg.

SES's board has also committed to distributing the majority of any extraordinary proceeds from the spectrum sale to shareholders. This focus on returning capital aligns with the company's new strategy of prioritizing government and defense contracts according to Bloomberg. Additionally, the satellite firm is currently trading with a 10% dividend yield, making it an attractive option for income-focused investors according to Bloomberg.

Risks to the Outlook

Despite the strategic shift and potential windfall, SES still faces significant risks. The recent earnings miss and stock price decline highlight the company's reliance on a volatile market. If the spectrum auction fails to materialize or if the K2 partnership underperforms expectations, the stock could see further pressure according to Bloomberg.

The satellite industry is also highly competitive, with companies like SpaceX and EchoStar Corp. gaining traction in both commercial and government markets. EchoStar's market value has tripled this year after selling spectrum to SpaceX and launching a satellite phone network according to Bloomberg. SES must prove that its defense pivot is sustainable and scalable to maintain its market position.

Davide Leone & Partners has a history of investing in companies with significant governance or strategic repositioning potential. The fund also holds large stakes in Banco BPM SpA and Telecom Italia SpA's savings shares according to Bloomberg. Its recent legal victory in a London employment tribunal underscores the fund's focus on maintaining a fair and transparent internal environment according to Bloomberg.