At Deal’s Close, Telesat, Loral Begin Merging Satellite Fleets

PARIS —


Telesat Canada’s acquisition by Loral Space and Communications Co. and a Canadian pension fund was completed Oct. 31, permitting Telesat to consolidate Loral’s four-satellite fleet of Skynet spacecraft into Telesat’s operations. The deal also allows the new company to realize 58 million Canadian dollars ($60.3 million) in operating cost savings, according to Loral and Telesat officials.

“We will start in earnest today to combine the fleets,” Telesat Chief Financial Officer Ted Ignacy said. “There is almost no duplication in the two companies’ customer sets. We are very complementary. The synergies will come on the administrative side, and we expect most of them to be realized by late 2008.”

New York-based Loral and Telesat of Ottawa have estimated that it will cost about 35 million Canadian dollars in one-time charges as it pays severance and incurs other costs associated with shutting down operations that now are redundant.

Telesat has long experience in operating not only its own satellites, but fleets of other companies as well – including satellites owned by XM Satellite Radio, WildBlue Communications and DirecTV Inc.

None of the satellites Telesat currently operates are Loral 1300 models, which means there will be some added investment, mainly in computers and antennas, to facilitate the merger of these spacecraft into Telesat’s largely automated operations. But Ignacy said some of that investment would have occurred anyway because one of the two satellites Telesat has on order, the Nimiq 5, is a Space Systems/Loral model.

As part of its restructuring now that its Skynet operations have been transferred to Telesat, Loral is reducing staff at its New York headquarters – a move that Loral shareholders have said is long overdue.

Loral said the staff reductions, including the elimination of the position of president once Eric J. Zahler leaves at the end of the month, will permit Loral to save some $10 million a year. One-time charges associated with the restructuring will cost $7 million, Loral said.

“Up to now the New York office has been responsible for two operating companies – Loral Skynet and Space Systems/Loral,” Loral spokesman John McCarthy said Nov. 1. “With the transfer of Skynet to Telesat, we are able to cut costs that we could not have cut before.”

Loral owns 64 percent of the economic rights of the enlarged Telesat Canada. It paid for that with the transfer of ownership of the five Skynet satellites – the four in orbit plus the Telstar 11N spacecraft currently under




construction – and $178 million in cash.

PSP Investments of Canada financed the remaining 36 percent of the transaction, whose total value was 3.25 billion Canadian dollars. PSP and other Canadian investors will have 66.7 percent of the voting rights in Telesat, which is in keeping with Canadian law requiring Canadian ownership of telecommunications carriers. Loral has 33.3 percent voting rights.

When the agreement was announced in late 2006, Loral entered into a series of hedging transactions to lock in the then-prevailing exchange rate between the Canadian and U.S. dollars.

For Loral, the hedging was considered a defensive move. As it turned out, the spectacular decline of the U.S. dollar in the past 12 months compared to the Canadian dollar has transformed the hedge into a windfall for Loral and Telesat.

The Canadian dollar today is worth 16 percent more in U.S.-dollar terms than it was when the Telesat deal was announced. The result: Loral’s currency hedge permitted the company to realize a gain of $123 million, and reduced Telesat’s need to borrow $225 million.

Loral said the net effect is that much of its cash outlay was covered by the currency gains, despite the fact that Telesat, in U.S. dollar terms, is 16 percent more valuable now than it was when the sale was announced.

The new Telesat operates a fleet of 12 telecommunications satellites, with three on order.

In its last financial announcement in its previous configuration, Telesat reported Oct. 30 an 18 percent increase in revenue for the first nine months of this year, and a nearly 8 percent increase in net profit, following the entry into service of a new satellite with EchoStar as an anchor customer, Telesat announced Oct. 30.

Telesat reported 413.4 million Canadian dollars in revenue for the nine months ending Sept. 30 compared to the same period a year ago. Net profit, at 90.9 million Canadian dollars, was up 7.7 percent for the same period.

Revenue growth was driven in part by the Anik F3 telecommunications satellite, which entered service in May. All 32 Ku-band transponders on the spacecraft have been leased to U.S. satellite-television provider EchoStar Communications Corp. for the satellites full 15-year service life.

Another contributing factor has been Telesat’s use of the DirecTV 1 satellite, renamed Nimiq 4iR, which was leased from DirecTV Group of El Segundo, Calif., earlier this year. Telesat has sold the satellite’s capacity to Canadian satellite-television broadcaster ExpressVu.