Equity Question Only Snag for Loral’s Plan To Spin Off SS/L

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PARIS Loral Space and Communications expects to spin off its Space Systems/Loral satellite manufacturing division in the first half of 2012 pending a resolution of how the equity of Loral’s biggest shareholder will be treated in the spun-off company, Loral Chief Executive Michael B. Targoff said Nov. 10.

In a conference call with investors, Targoff said Delaware corporate law requires that an independent committee be created to assess the fact that, in principle, MHR Fund Management LLC of New York would own some 60 percent of Space Systems/Loral (SS/L) once it separates from its corporate parent.

MHR currently has a 38 percent share of New York-based Loral’s voting stock and a 21 percent stake in nonvoting stock. In the normal course of events, MHR would receive its equity in an independent Space Systems/Loral in voting stock, which would put the ownership stake over the threshold that, under Delaware regulations, requires a special committee to investigate.

Targoff said MHR has indicated it is willing to work the issue so that its shares’ status does not hold up the spinoff. He said he was confident that the transaction would occur in the first or second quarter of 2012.

Key to the transaction’s expected tax-free status will be Loral’s 56 percent stake in Xtar LLC, a company Loral owns with a Spanish consortium. Xtar owns and operates two X-band satellites in orbit intended for use by the Spanish Ministry of Defense and the defense forces of other NATO nations.

Xtar’s performance has been far less than expected, which is perhaps why it is key to the tax treatment for Loral of the SS/L spinoff. For the nine months ending Sept. 30, Xtar reported an operating loss of $7.4 million on revenue of $25.9 million results little changed from the same period a year ago.

SS/L, in contrast, has been performing well in a generally buoyant market for commercial spacecraft worldwide. For the nine months ending Sept. 30, SS/L reported revenue of $802 million and an EBITDA earnings before interest, taxes, depreciation and amortization margin of 12 percent of revenue. Both figures were down from the same period a year ago, which included an exceptionally profitable period.

SS/L backlog as of Sept. 30 stood at $1.5 billion.

Palo Alto, Calif.-based SS/L is almost entirely focused on building commercial telecommunications satellites. The company is embarked on a three-year, $200 million capital investment program to expand its factory’s capacity.

Optimal throughput for SS/L, Targoff said, is six or seven large, high-power telecommunications satellites per year. The system is stressed if the number of satellites, or their average size and complexity, falls below that level.

The smaller-than-optimal satellite mix in SS/L’s current backlog will depress revenue and profit in 2012 as these spacecraft work through the factory, Targoff said. EBITDA margin is likely to drop to between 8 and 10 percent of revenue before returning to 10 percent or more in 2012.

SS/L’s total orders for 2011 stood at six satellites following the Nov. 11 contract for two spacecraft to be built for AsiaSat of Hong Kong. The satellites, both to be ready for launch in 2014, have a combined value of $233 million.

Both satellites will use SS/L’s 1300 satellite platform and will expand AsiaSat’s capacity for its markets in Asia, the Middle East and Oceana.

AsiaSat 6 will carry 28 high-power C-band transponders. The contract is valued at $114.5 million but could rise to $120.4 million if AsiaSat elects to fit the spacecraft with plasma-electric propulsion for its on-board station-keeping, AsiaSat said in a filing with the Hong Kong Stock Exchange.

Such a decision likely would decrease the satellite’s weight at launch by reducing the amount of conventional fuel that it would need to maintain itself stably in orbit over its 15-year life. AsiaSat’s contract includes an option to build a satellite similar to AsiaSat 6 for $117 million.

AsiaSat 8 will carry 24 Ku-band transponders as well as a Ka-band beam under a contract valued at $118.5 million. Here, too, AsiaSat is reserving the right to replace at least part of the conventional on-board propulsion with plasma-electric units. If it selects this alternative, the contract price will rise to $124.4 million.

AsiaSat has purchased an option to build a second AsiaSat 8 satellite for $122 million.

Both contracts include orbital incentive clauses under which 10 percent of the contract value will be paid only if the satellites function as expected in orbit over 15 years.