UPDATED March 2, 11:27 a.m. EST
DUBAI, United Arab Emirates — Loral Space and Communications has suspended preparations to spin off the company’s satellite manufacturing division to focus on a strategic transaction with an unnamed buyer or group of buyers, Loral Chief Executive Michael B. Targoff said March 1.
“Something has arisen,” Targoff said in a conference call with investors, referring to a strategic initiative to purchase commercial satellite maker Space Systems/Loral (SS/L) of Palo Alto, Calif.
Targoff declined to specify the type of strategic transaction, but said it represented a potentially more favorable result for Loral shareholders — who have been waiting for nearly two years for New York-based Loral to divest SS/L — compared with the intended spinoff.
Industry officials have said in the past that the two U.S.-based companies with the most to gain from an SS/L purchase would be satellite builders Lockheed Martin Space Systems of Sunnyvale, Calif., and Orbital Sciences Corp. of Dulles, Va.
Lockheed Martin would gain an immediate customer base in the commercial telecommunications market, where the company has been relatively quiet, having elected to focus on a decade of unprecedented growth in the U.S. military space market.
Orbital is active commercially, but at the lighter end of the market, which has not been growing as fast as has demand for the heavier, high-power satellites that are SS/L’s specialty.
In addition, MDA Corp. of Canada has been considering a large transaction in the United States to better position itself to win U.S. government business. MDA has begun to position itself as a satellite prime contractor competing with SS/L as well.
Loral said in November that it had established a special committee to untangle the complicated regulatory and tax consequences of a spinoff of SS/L to its current shareholders.
Targoff said the arrival of this “potentially more attractive opportunity” caused the company to suspend the committee. He said it could be reactivated quickly if the strategic sale falls through. Whether the strategic transaction will succeed should be known by June, he said.
For the 12 months ending Dec. 31, SS/L reported revenue of $1.1 billion, down 5 percent from 2010. Targoff said the manufacturer, which booked six telecommunications satellite orders in 2011, had an EBITDA, or earnings before interest, taxes, depreciation and amortization, equivalent to 12 percent of revenue.
Because the six satellites booked in 2011 are smaller than the spacecraft booked in 2010, SS/L’s EBITDA margin is likely to fall to 8-10 percent of revenue for the next two years, Targoff said, before returning to 10 percent or better starting in 2014.
SS/L had $120 million in cash as of Dec. 31. Backlog was $1.4 billion, down from $1.6 billion a year earlier. The company has already won three satellite contracts in 2012.
In a Feb. 28 submission to the U.S. Securities and Exchange Commission (SEC), Loral said one of SS/L’s 2011 satellite contracts requires the company to put customer payments into an escrow account until the satellite is launched.
In an apparent reference to its $668 million, two-satellite award from Australia’s NBN Co., Loral said in the SEC filing that it has been obliged to place a $60 million performance bond in an escrow account.
Loral said SS/L is spending $200 million between 2011 and 2013 to expand its production facilities in Palo Alto, including construction of a second thermal vacuum chamber.
For many of its contracts, SS/L agrees to take around 10 percent of its payments in the form of orbital incentives. The customer parcels out the withheld money, plus interest, in annual increments as the satellite functions in orbit during its 15-year service life. As of Dec. 31, SS/L was carrying on its books some $230 million in orbital incentives for satellites already in orbit, and $141 million for satellites under construction. SS/L in 2011 recorded an $8.5 million charge reflecting a loss of orbital incentives following the partial in-orbit failure of the Estrela do Sul-2 satellite following the nondeployment of a solar array.
Targoff said that in 2011, SS/L won six of the 13 openly competed contracts for large telecommunications satellites that are SS/L’s specialty.
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