Space Systems/Loral Acquisition Boosts MDA’s Access to U.S. Market

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VICTORIA, British Columbia — The recent move by MacDonald, Dettwiler and Associates (MDA) to purchase Space Systems/Loral fulfills a long-term strategic goal of the Richmond, British Columbia company to gain access to U.S. markets.

“This gives us the critical mass in the U.S. to win business we are unable to win at this point,” Dan Friedmann, MDA’s chief executive, said about the proposed deal.

He called the purchase “a game-changing transaction” for MDA.

MDA, one of Canada’s top space and defense firms, announced June 26 it intends to buy the Palo Alto, Calif.-based company for $875 million.

MDA and Loral Space & Communications of New York, the parent company of Space Systems/Loral, expect the purchase to be finalized by September.

MDA dominates Canada’s civilian and military space industry. It provided the robotic arm for NASA’s space shuttle and the international space station and is the prime contractor for Canada’s Radarsat-2 Earth observation satellite.

It has failed, however, in the past to gain substantial work in the United States.

Kevin Shortt, president of the Canadian Space Society, said MDA has been trying since 2008 to gain access to the U.S. market, and the Space Systems/Loral acquisition is a key strategic move to fulfill that goal.

“The purchase of Loral gives them a big foot in the door” in the United States, Shortt said.

Space Systems/Loral is a top manufacturer of commercial telecommunications satellites, and Friedmann has noted he expects the deal to significantly increase MDA’s role in such commercial business. But he also suggested the planned purchase will open up the U.S. defense and intelligence market for MDA’s technology.

“MDA capabilities in the robotics, surveillance and intelligence areas have a large demand in the United States — demand that we have just not been able to access,” Friedmann said during a June 27 investors’ conference call. “Traditionally, we have won the design phases but not the contract, because the work is not done in the U.S. When the big programs go forward, we get sent home.”

MDA has expressed interest in new technology areas such as the in-orbit refueling of satellites. It has also proposed using a small satellite to salvage still-usable sensors from dysfunctional satellites in orbit. The Pentagon’s Defense Advanced Research Projects Agency has examined MDA proposals in that area and has shown interest, company officials said.

The June 27 announcement of the proposed Space Systems/Loral purchase saw MDA shares increase that day by 28 percent to 57.25 Canadian dollars ($55) per share on the Toronto Stock Exchange. (They were at 55.16 Canadian dollars July 19).

BMO Capital Markets of Toronto noted the positive impact on MDA stock from the proposed purchase.

Space Systems/Loral has 3,100 employees and 2011 revenue of $1 billion. MDA has 2,200 employees and 2011 revenue of 761 million Canadian dollars.

MDA notes that the purchase of Space Systems/Loral brings with it a highly skilled work force and a 120,000-square-meter, state-of-the-art production facility.

Despite years of trying, MDA has had little success gaining better access to the U.S. space market. At one point, the company proposed getting out of the space business and concentrating on the creation of information systems to support the housing and real estate market.

As part of that strategy, in early 2008, MDA announced that Minnesota-based Alliant Techsystems would purchase its space division for 1.33 billion Canadian dollars in cash.

But the proposed deal generated intense political and public controversy, with objections from Canadian politicians and scientists. They warned that the sale would devastate the country’s space industry and transfer ownership of the nation’s main surveillance satellite, Radarsat, to a U.S. firm.

In April 2008, the Conservative government of Prime Minister Stephen Harper refused to approve the sale, noting that it did not consider the transaction “to be a net benefit to Canada.”

But the government has not come through with any significant contracts to support MDA in the years since.

At the same time, other military programs that MDA was interested in, such as the government’s plan to spend 1 billion Canadian dollars on a fleet of unmanned aerial vehicles, stalled.

Friedmann said the purchase of Space Systems/Loral would insulate MDA from any downturn in the Canadian Space Agency’s budget, as well as a slowdown or cancellation of the Radarsat Constellation Mission (RCM), a key satellite surveillance program being planned by the space agency and the Canadian military.

The government announced in April that it would reduce the Canadian Space Agency’s budget from 424 million Canadian dollars to 363 million Canadian dollars. In coming years, the agency’s budget is expected to drop back to its regular base level of around 300 million Canadian dollars.

The budget cut prompted MDA, which is overseeing the design of the RCM spacecraft, to issue a warning that the reductions could jeopardize the project. It noted the government had not indicated when funding for the construction of the three satellites would be forthcoming even though the first launch is planned for 2014.

The RCM project, estimated to cost 1 billion Canadian dollars, would provide the government and military with a satellite system to conduct surveillance day or night and in all weather conditions.

RCM was initially focused on maritime security requirements, but land security, particularly in the Arctic, will be dramatically enhanced by the constellation, according to the Canadian Space Agency.

The government has stated it is still committed to RCM but has not provided any new details about how it will proceed with funding the system.

Shortt said the reductions in the Canadian Space Agency’s budget and delays in RCM likely did not play a key role in MDA’s decision to seek out and purchase a U.S. company.

“This deal was likely in the works long before the current stall in Canadian space projects,” he said. “However, given that this is just the latest in a longstanding trend of setbacks, MDA probably wanted to prepare for the worst.”

 

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