PARIS — Loral Space and Communications has hired two investment banks to manage an initial public stock offering of up to 19.9 percent of the company’s satellite manufacturing division, Space Systems/Loral, and also “evaluate other strategic alternatives for” the satellite builder, Loral Chief Executive Michael B. Targoff said May 11.
New York-based Loral is apparently seeking to reduce its exposure to what many industry experts say is a likely dip in the commercial satellite manufacturing market in the coming years as the largest satellite fleet operators wind down their current fleet-replacement and expansion efforts.
Palo Alto, Calif.-based Space Systems/Loral has been one of the most successful commercial satellite builders in recent years, specializing in large, complex spacecraft for high-power television broadcasts, broadband Internet access and certain mobile broadband applications.
But unlike its rivals in the United States and Europe, Space Systems/Loral does not have a significant government business to tide it over during dips in the commercial satellite manufacturing business cycle.
Loral officials have said that to cover its fixed costs, Space Systems/Loral must win at least four or five satellite orders per year. With a recent expansion of its capacity, the manufacturer is capable of handling up to nine satellites under construction at a time.
The global commercial telecommunications satellite market in recent years has averaged as many as 25 to 30 satellites annually. But judging from recent capital expenditure plans of the largest fleet operators, that figure is likely to drop to between 20 and 25 spacecraft per year starting in the next year or two. Some of these satellites are too small to be of much interest to Loral, meaning the company’s addressable market in the coming years will likely be less than 20 spacecraft worldwide.
Loral Space and Communications owns a 64 percent economic interest in satellite fleet operator Telesat of Canada, a relationship that, in practice, has given Space Systems/Loral a regular market for its satellites despite Telesat’s insistence that it contracts for satellites on an arm’s-length basis.
Despite Space Systems/Loral’s undisputed success in the commercial market, the business of building commercial satellites remains one of single-digit operating profit margins and what to outsiders are curious features. One of these is that a satellite manufacturer routinely agrees that its customer may withhold 10 percent or more of the contracted price of a satellite pending the satellite’s in-orbit performance over 15 years. The unpaid portion of the contract, often referred to as an orbital incentive, is paid out in annual slices, with interest, as long as the satellite operates as designed.
Space Systems/Loral reported revenue of $230.9 million for the three months ending March 31, up 6.7 percent from the same period a year earlier. The company said its manufacturing costs for the first three months of 2010 were equivalent to 92 percent of the value of its satellite contracts, compared with 93 percent a year earlier.
Space Systems/Loral’s backlog at March 31 stood at $1.4 billion.
Targoff said the company has won two new orders since its first-quarter financial report closed. One is with Satmex of Mexico, whose financial outlook remains unclear despite the contract. The second is with an unnamed customer who signed an authorization to proceed with Space Systems/Loral to start work on a satellite. Industry officials have been expecting Telesat to announce that Space Systems/Loral has won a competition to build Telesat’s Anik G1 satellite.
