Canberra-based defence contractor Electro Optic Systems Holdings (ASX: EOS) will acquire US satellite communications systems business Audacy Corporation for $10 million.
The acquisition will allow the company to build a network of satellites capable of end-to-end communications and data transfer services to government and commercial customers worldwide.
The key rationale behind the acquisition appears to be the vitally important space station spectrum licence held by Audacy, which authorises the company to use specific microwave spectrum brands for communication to and from satellites and ground-based terminals.
In order to use this licence, EOS will have to launch a constellation of new mid-earth orbit satellites to establish a communications capability for continuous, real-time data transfer with low earth orbit satellites and other space vehicles.
As part of Audacy's licence, which it received in June 2018, the company is required to launch this constellation of satellites by June 2024.
EOS appears to be reluctantly entering this market because of customer demand, highlighting in its statement regarding the proposed acquisition that better technologies exist already.
"In the long-term EOS expects most space communications to be implemented with optical communications a technology that is not regulator or controlled because it cannot interfere with other users," says EOS.
"However, 99 per cent of all space communications presently employs microwave technology."
"Acknowledging the current dominance of microwave technology, EOS has decided to enter the regulated microwave communications domain through the Acquisition, as one of several channels the Company intends to apply to commercialise its optical, microwave, and hybrid microwave-optical communication technologies."
The acquisition is not a sure thing quite yet; the transfer of Audacy's licence to EOSDS is subject to review by the US Federal Communications Commission.
The takeover will be completed via Alabama-based subsidiary EOS Defence Systems USA (EOSDS), which two weeks ago appointed a new board of directors amidst a push for an expanded role in 2020.
EOSDS is not required to make any material payment for the acquisition until FCC approval is received.
EOS says this approval "cannot be assured", but if the green light is received the company expects to complete the acquisition in mid-2020.
According to EOS CEO Dr Ben Greene, the move into space communications is a big leap for the listed company which primarily works in the software, laser, electronics, and weaponry side of the defence industry.
"EOS has previously disclosed its intention to enter the space communications market, and the Acquisition represents a logical next step towards that goal," says Greene.
"Over fifty potential customers have executed non-binding memoranda relating to the proposed space communications service, and EOS expects to finalise the initial constellation design soon so that those memoranda can be progressively converted to service contracts soon after completion."
Greene also highlights how building a constellation of satellites by June 2024 is a major hurdle for the company to overcome, considering how capital intensive such a task would be.
"EOS will later decide whether to implement the new satellite constellation on its own or through a partnership with an existing space communications entity," says Greene.
"Potential partnerships are in early stages of development with major space entities which EOS has worked with before."
Shares in EOS are up 4.97 per cent to $10.34 at 11.38am AEDT.
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