Loral Touts Fleet-Merger Savings, Eyes Satellite Plant Expansion

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PARIS — Combining Loral’s fleet of four satellites, plus one on order, with Telesat Canada’s existing fleet will save between 45 million and 70 million Canadian dollars ($38.4 million and $59.7 million) per year in overhead and operating costs, New York-based Loral Space and Communications said.

In a March 15 filing to the U.S. Securities and Exchange Commission (SEC), Loral said the new Telesat will carry a debt load totaling $2.8 billion once Telesat’s current owner, BCE Inc., takes out its one-time dividend and once Telesat assumes the debt from the sale of the company.

Some $1.9 billion of Telesat’s new debt will be secured by virtually all the company’s assets.

Loral will own 64 percent of the economic rights in the new Telesat but just 33 percent of the voting rights in the company — in keeping with Canadian law stipulating continued Canadian control of the telecommunications operator. Loral’s partner in the Telesat purchase, PSP Investments of Canada, will own the remaining shares.

The sale of Ottawa-based Telesat Canada to Loral and PSP is valued at 3.42 billion Canadian dollars, including Telesat’s currently modest debt.

Meanwhile, Loral Chief Executive Michael B. Targoff, in a March 16 conference call on the company’s 2006 financial results, said Loral’s decision to permit its largest investor, MHR Fund Management LLC, to purchase $300 million in Loral preferred stock was irrevocable.

Several Loral shareholders had protested that the deal, announced in October, was overly favorable to MHR and that Loral could have secured better terms if it had shopped the proposal to its other shareholders.

Targoff said Loral, upon learning of the shareholder protest, attempted to renegotiate the terms with MHR to permit other shareholders’ offers to be considered, but that MHR had declined. Targoff declined to respond to questions about the arrangement, citing pending shareholder litigation.

Targoff said Loral has sufficient cash to continue operations into 2008 and will use the $300 million from MHR for future operations and for possible acquisitions. Loral is considered a likely bidder for Satmex, a Mexican satellite operator now being auctioned.

While Loral’s biggest move in recent months has been the Telesat purchase and the agreement to merge the two companies’ satellite fleets, it is Loral’s satellite-manufacturing business, Space Systems/Loral, which is driving revenue growth.

Targoff said the commercial market looks so good that Loral is weighing a $150 million plant expansion at Space Systems/Loral to meet expected strong demand for large, high-power telecommunications satellites.

The announcement illustrates how far Loral’s success has taken it from the situation of its principal U.S. and European competitors, all of which in recent years have viewed the commercial market as an overcrowded, low-margin business that doesn’t deserve substantial new investment.

In the conference call, Targoff said Loral also will go after U.S. military satellite contracts, a market that has escaped the company up to now.

But even without a substantial U.S. Defense Department business, Targoff said Loral would need to expand its Palo Alto, Calif., operations to handle expected commercial orders. The expansion, which has not yet been approved by Loral’s board, would occur over the next three years and cost up to $150 million, Loral said in a its SEC filing .

Space Systems/Loral generated revenues of $697 million in 2006, up 42 percent from 2005 as the company reaped the rewards of orders booked in 2003 and 2004, the parent company reported March 15. Backlog stood at nearly $1.2 billion, a reflection of the seven satellite contracts Loral won in 2006.

The backlog includes $116 million in orders from Loral Skynet, Loral’s satellite-fleet operating unit that will be absorbed into Telesat Canada when the Loral-PSP purchase of the Canadian satellite-fleet operator is completed later this year.

Loral Skynet reported $162 million in revenues for 2006, up 8 percent from 2005. The four-satellite Skynet fleet was 68 percent booked as of Dec. 31, Targoff said .