PARIS — Loral Space and Communications has the right to veto Telesat Canada’s possible sale of its Telstar 10 and Telstar 18 satellites because of the likely adverse tax consequences on Loral if the sale occurs before November 2012, New York-based Loral said.
Ottawa-based Telesat in late 2008 received a $200 million offer from an undisclosed buyer for the satellites. Telesat is under pressure to decide in the coming months whether to accept it because a decision on whether to replace the aging Telstar 10 spacecraft must be made this year.
Telesat, which was laden with substantial debt as part of its late-2007 acquisition by Loral and Canadian pension fund PSP Investments, has estimated it would need to spend $225 million to replace Telstar 10.
In a March 16 submission to the U.S. Securities and Exchange Commission (SEC), Loral said that as part of its late-2007 sale of its Telstar satellites to Telesat, it deferred a tax gain of $308 million. If Telesat were to sell all or most of the former Loral assets, Loral would be forced to recognize the gain, with retroactive effect to 2007, forcing a tax bill of about $119 million, plus interest.
“Telesat has agreed that, prior to November 1, 2012, without our prior consent, it will not dispose of assets having a value, whether individually or in the aggregate, in excess of $50 million” if Loral determines that the sale would have adverse tax consequences for Loral, the SEC filing said.
Loral has a 64 percent economic ownership of Telesat and 33.3 percent of the voting rights. Loral’s dilemma is that it may need to choose between preserving its own tax gain and enhancing the value of Telesat.
The satellite sale is not the only example of the potential diversion of interest between Loral – whose main business is satellite maker Space Systems/Loral – and Telesat, a satellite fleet operator.
Loral has taken a 15 percent interest in the large ViaSat-1 Ka-band broadband satellite being built for ViaSat Corp. of Carlsbad, Calif., as a condition of being awarded the contract to build ViaSat-1.
Loral’s stake is specific to ViaSat-1’s Canadian beams, and Loral has said it expects to sell its interest in the project to Telesat. But in the 14 months since Loral won the contract, Telesat has not exercised the option to buy, despite the fact that the premium it must pay Loral increases with the passage of time, from $6 million to $13 million until the option expires Oct. 31.
Loral has said its Viasat-1 commitments total $60 million, a cost Telesat would need to assume, in addition to the premium, if it exercised the option, according to Loral. Telesat officials did not list ViaSat-1 as a likely 2009 expenditure during a March 13 conference call with investors.
In a March 17 conference call with investors, Loral Chief Executive Michael B. Targoff did not address the possible Telesat sale of one or more of its satellites. He did, however, address Loral’s majority ownership of another satellite operator, Xtar LLC of Rockville, Md.
Xtar owns the Xtar-Eur X-band satellite in geostationary orbit and has obligations to lease capacity on another, called Spainsat, that is owned by Loral’s Xtar partner, Hisdesat of Spain, and is used by the Spanish Defense Ministry.
The two satellites were launched in 2005 and 2006. Since then, Xtar has been unable to secure sufficient government customers, particularly in the U.S. Defense Department, to make a profitable business.
According to Loral’s SEC filing, Xtar reported a net loss of $28.6 million on revenue of $20.4 million in 2008. Xtar has been unable to pay Hisdesat what it owes under obligations to lease Spainsat capacity. Xtar’s debt to Hisdesat stood at $32.3 million as of Dec. 31 and is increasing to a maximum of $28 million per year for the remainder of Spainsat’s service life – a total future obligation totaling some $356 million.
Hisdesat has agreed to waive the payment obligations for now.
As part of its Xtar-Eur launch services contract with Arianespace of Evry, France, Xtar entered into an unusual payment scheme under which part of the launch payment was to come from an annual percentage of Xtar revenue.
In January, Arianespace and Xtar agreed to scrap the terms of the contract in exchange for an immediate Xtar payment of $8 million to be paid between February and June. As a 56 percent shareholder in Xtar, Loral paid $4.5 million of that sum.
“The Xtar business has been disappointing,” Targoff said in the conference call. “I hope that next year I won’t be saying that. No predictions, but I am feeling better about the tenor of the market for Xtar.”
Loral said its Space Systems/Loral satellite manufacturing business reported revenue of $881.4 million in 2008, an 8 percent increase over 2007. The company’s adjusted earnings before interest, taxes, depreciation and amortization was 5.1 percent of revenue, up from 4.2 percent a year earlier.
Space Systems/Loral’s backlog stood at $1.4 billion on Dec. 31.
Targoff said Loral would not need to access the capital markets in 2009 for either Telesat or Space Systems/Loral. But in its SEC filing, Loral said it might seek additional financing anyway this year to give Space Systems/Loral of Palo Alto, Calif., more margin in the event of unforeseen costs, and to “bolster confidence of [Space Systems/Loral’s] customers in Space Systems/Loral as a critical supplier.”