On Eve of Sale, Telesat Buys Up ViaSat-1’s Canadian Capacity

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PARIS — Canadian satellite operator Telesat, on the eve of what is likely to be its multibillion-dollar sale to a group of private equity investors or competitor Intelsat, on March 3 reported a double-digit increase in gross profit for 2010 and said it has agreed to purchase all the Canadian capacity on a large Ka-band broadband satellite in a transaction with its current majority shareholder, Loral of New York.

In a conference call with investors, Telesat officials declined to comment on the status of what they have always said could be a stock market listing or a sale. But industry officials said the interest shown by Luxembourg- and Washington-based Intelsat, and a group of private equity investors, makes it almost certain that Telesat will be sold in a transaction that may not reach Telesat’s original goal of nearly $7 billion, but will be more than $5 billion.

Telesat reported that its revenue in 2010 was 821 Canadian dollars ($821 million), up 4 percent over 2009 and 8 percent if the U.S. dollar’s decline against the Canadian currency is removed from the equation. EBITDA, or earnings before interest, taxes, depreciation and amortization, was 76 percent of revenue, up from 71 percent in 2009 as Telesat slashed its operating and administrative expenses by 15 percent during the year.

Backlog stood at 5.5 billion Canadian dollars at Dec. 31, similar to where it was a year ago despite the drop in the U.S. dollar, which is the currency used for many satellite bandwidth leases. Telesat said its satellite fleet over North America was 88 percent full as of Dec. 31. Its international fleet was 78 percent full.

Ottawa-based Telesat has agreed to pay Loral a $13 million premium for the Canadian beams, plus reimburse Loral for $48.2 million in costs Loral has incurred as its share of ViaSat-1 construction, launch and insurance payments, and Loral’s investment in ViaSat-1 gateways and other equipment.

Loral Space and Communications described the transaction in a March 4 filing with the U.S. Securities and Exchange Commission (SEC). The deal also provides that Telesat will equally divide, for the first four years, any supplemental revenue it generates from the ViaSat-1 bandwidth beyond the consumer broadband contract that Loral signed with Canadian consumer broadband service provider Barrett Xplore Inc. in mid-2010.

The Barrett Xplore contract is valued at 262 million Canadian dollars ($269 million) over 15 years. Barrett will have access to about 12 gigabits per second of ViaSat-1 throughput. The contract with Woodstock, New Brunswick-based Barrett Xplore is transferring to Telesat along with ownership of the Canadian beams.

Loral had purchased the Canadian capacity of ViaSat-1 as a way of assuring that its satellite manufacturing subsidiary, Space Systems/Loral of Palo Alto, Calif., received the ViaSat-1 construction contract. The satellite is scheduled for launch in mid-2011.

Loral had expected to be able to make a quick turnaround sale of the Canadian beams to Telesat, offering Telesat the opportunity to purchase the Canadian ViaSat-1 capacity at cost, plus a $6 million premium that would rise to $13 million depending on when Telesat agreed to the purchase. But the Canadian operator in 2008 declined to exercise the option, and it expired.

In a March 3 conference call with investors, Telesat Chief Executive Daniel S. Goldberg said the ViaSat-1 project in general has been “meaningfully de-risked” since the original offer was made, and that buying ViaSat-1 bandwidth fits with Telesat’s current business, which includes offering Ka-band bandwidth on Telesat satellites for Canadian consumers.

Loral’s SEC filing says the company has rights to one-half of any revenue Telesat generates from selling “supplemental” or “non-geostationary” capacity on ViaSat-1 beyond the consumer broadband deal with Barrett for the first four years after this capacity is sold.

Loral and Canadian pension fund PSP Investments purchased Telesat in October 2007 in a transaction that loaded substantial debt onto Telesat’s books. But despite the need to reduce debt, Telesat has been able to maintain a capital spending program that now includes three new satellites under construction, plus the ViaSat-1 stake. The company operates 12 satellites in orbit.

Telesat said its debt as of Dec. 31 was 3.1 billion Canadian dollars, slightly less than five times EBITDA. Two other large satellite fleet operators that may have been interested in bidding for Telesat — SES of Luxembourg and Eutelsat of Paris — have said they are not interested, in part because they could not justify the price.

 

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