Canada’s MDA Sees Business Case for In-orbit Satellite Servicing

by

PARIS — Canada’s MDA Corp., with little debt and now entering a period of predictably strong cash flows, believes its money is better placed investing in a future in-orbit satellite servicing business — something that has never been attempted — than in repurchasing its stock or increasing shareholder dividends, MDA Chief Executive Daniel E. Friedmann said May 5.

In the clearest indication yet that MDA believes it has found a sustainable satellite-servicing business model that has eluded everyone else, Friedmann said the Richmond, British Columbia-based company plans a major investment in the business starting late this year.

In a conference call with investors, Friedmann did not say how much MDA thinks it will need to finance a first robotic mission to deliver fuel or to perform another service on a satellite in orbit. He said “it may be more or less than” an investor’s guess of 200 million Canadian dollars ($195 million).

But he said the more the company investigates the business, the more potential missions, both commercial and military, it finds for a robot capable of attaching itself to a satellite in orbit.

“Certainly talking to defense customers, we’ve discovered markets we didn’t know we had an opportunity to go after,” Friedmann said. “It will be a significant use of capital for organic growth. That’s our first [near-term investment] priority as we work through the spring and summer to finalize it.”

MDA will likely withhold significant further cash investment until at least one firm customer signs up for a mission. But for now, the company is telling its shareholders that in-orbit servicing is MDA’s most promising new business venture.

“When you first look at it, it sounds pretty simple,” Friedmann said. “People need gas, so you open up a gas station and fill the tank. But everybody so far has been focused on spending their gas and then throwing away their cars — in this case, their satellites — and buying new ones. We have to make sure people are putting their [satellite-manufacturing] plans on hold, expecting to gas up or repair.”

It remains unclear how long it would take MDA to build a flight-qualified robot for a satellite-servicing mission. Friedmann suggested that a mission is possible as early as 2013. Until a firm contract is in hand, MDA will not seek to purchase a launch vehicle to carry the robot into orbit.

Numerous ideas for satellite servicing — to repair damaged spacecraft, to refuel satellites nearing retirement and to remove from orbit large satellites that one day could break up and add to the population of space debris — have been floated over the past 20 years. None of them has been pursued because the sponsors have been unable to figure out how to make it a profitable business.

Meanwhile, MDA reported sluggish business selling Radarsat radar Earth observation data to the U.S. government, which accounts for half of all Radarsat and Radarsat-2 sales, in late 2009 and continuing through the first three months of 2010.

But overall, the company’s Information Systems division, which includes space hardware and space and aerial surveillance services, has returned to robust health in the past year on the strength of Canadian government contracts, commercial work on Earth observation systems and a strengthened satellite communications division.

For the three months ending March 31, the Information Systems division reported revenue of 132.9 million Canadian dollars, a 12.3 percent increase over the same period a year earlier. Operating earnings, at 33 million Canadian dollars, were up 40 percent over the previous year.

MDA Chief Financial Officer Anil Wirasekara said the company’s near-term financial prospects show robust growth and continued healthy cash flow. Taking on new debt to finance organic growth or growth through an acquisition would be no problem, he said.

Big new contracts expected in the coming months include Canada’s Radarsat Constellation Mission, a follow-on to Radarsat-2, and a $254 million telecommunications satellite for the National Space Agency of Ukraine, with financial backing from Export Development Canada, which is Canada’s export-credit agency.

MDA booked $60 million in new contracts earlier this year to provide electronics payloads for two Russian telecommunications satellites in a further bid to raise its profile from that of a third-tier components builder to a prime contractor.

When one investor suggested that it would be preferable to increase the stock dividend and thereby cause a jump in the stock price instead of investing in satellite servicing, Friedmann responded: “You sound like my father.”