Loral Urges Shareholder Patience on IPO vs. Spinoff Decisions

by

PARIS — Loral Space and Communications on May 10 said its two operating divisions — satellite manufacturer Space Systems/Loral and satellite operator Telesat — are firing on all pistons and that neither is in immediate need of a stock market introduction or an outright sale.

In a conference call with investors, Loral Chief Executive Michael B. Targoff nonetheless said he understands investor frustration that a search for one or another option for both divisions, which has been going on for months, needs to come to an end at some point.

He said New York-based Loral hopes to be able to announce a decision by the end of June, but that with the satellite building and operating businesses doing so well, it is in no rush.

Targoff stressed in particular the recent strength of Palo Alto, Calif.-based Space Systems/Loral.

The satellite manufacturer reported a 14 percent operating-profit margin for the three months ending March 31, which is extremely high for a business in which double-digit margins are rare enough. Targoff said that if the company can maintain sufficient throughput in its recently upgraded factory, it can maintain margins of 10 to 12 percent over the long term.

Ottawa, Canada-based Telesat reported its financial results earlier. Loral has a 64 percent financial ownership stake in Telesat, and 33.3 percent of the voting rights. The remaining economic and voting ownership is held by Canadian pension fund PSP Investments.

In his May 10 remarks, Targoff stressed Telesat’s continued deleveraging, which has brought the company’s debt levels to a point where it can now safely take on more debt if need be.

Following the Loral-PSP purchase of Telesat in 2007, the satellite operator had net debt equivalent to more than eight times its earnings before interest, taxes, depreciation and amortization (EBITDA), which is considered high even in a sector known for high cash flows. The current debt is 4.4 times EBITDA, Targoff said.

With both companies in the pink of health, he said, “We feel no urgency to pursue any alternative. … Consequently, we may continue to focus on building these businesses, and growing them profitably. The alternatives still on the table range from sales or public offerings to staying the course, with or without recapitalization or any other internal restructuring alternatives that would seek to take advantage of the favorable credit markets.

“We would hope to have more clarity this quarter. The metrics of the companies speak for themselves.”

A Telesat stock market introduction or sale — industry officials said at least one group of private-equity investors has expressed formal interest in an acquisition — would in all likelihood dictate what Loral would do with Space Systems/Loral, Targoff said.

Space Systems/Loral reported revenue of $280.7 million for the three months ending March 31, up nearly 22 percent from the same period a year ago. EBITDA was $35.4 million, compared with $8.5 million a year ago.

The increase was not in itself surprising given the success the company has had in the commercial telecommunications satellite market in the past three years — seven satellites awards in 2008, seven again in 2009 and six in 2010.

But Loral said more than half the revenue increase and much of the gross-profit improvement was due to the fact that its satellite manufacturing plant is operating at higher efficiency levels, allowing Loral to achieve satellite production milestones more quickly and thus enabling the company to book revenue more quickly when using percent-of-completion accounting.

In a May 9 filing with the U.S. Securities and Exchange Commission (SEC), Loral said its current satellite manufacturing cost structure is based on winning four to five satellite awards per year. With its upgrades now nearing completion after a capital-spending plan of $135 million that will end this year, Loral is capable of handling up to eight satellites per year.

In recent years, Loral’s satellite work has been almost exclusively in the commercial satellite sector. Its principal U.S. and European competitors all have solid bases in their military and civil-government space markets. Sensing a decline in government business, some of these companies have indicated they would pay more attention to the commercial business.

Estimates of the future demand for commercial satellites have proved to be off target in the past. What is known is that several of the top commercial fleet operators will reduce their spending in the coming years after an unprecedented capital-spending cycle.

Targoff said new applications in broadband coupled with continued demand for direct broadcast television satellites will play to Loral’s strengths, allowing it to maintain its market share. The company has just one satellite order this year, with SingTel Optus of Australia.

In its SEC filing, Loral said its order this year included a demand by the customer that $36 million in contract milestone payments be placed into an escrow account, to be released to Loral when the satellite is delivered.

 

RELATED ARTICLE

Loral Improves Profit Margins as It Prepares Stock Offering