Telesat Canada Exploring Initial Stock Offering

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PARIS — Satellite fleet operator Telesat Canada on Nov. 4 said it will explore a possible stock offering as well as other strategic alternatives on instructions from the company’s board of directors.

In a conference call with investors, Telesat Chief Executive Daniel S. Goldberg declined to disclose whether the company had been given a deadline to determine whether an initial public offering of stock or some other transaction, such as Telesat’s purchase by another satellite operator or by financial investors, should be pursued.

Industry speculation on a transaction involving Telesat has been rampant since a change in Canadian regulations earlier this year removed the prohibition on non-Canadian ownership of Canadian satellite operators.

SES of Luxembourg has already taken advantage of the change by aligning its voting ownership of satellite operator Ciel of Canada with its existing majority economic stake.

Loral Space and Communications of New York owns a 64 percent economic stake in Telesat. PSP Investments, a Canadian pension fund, owns the remaining shares. But the voting rights ownership shares are reversed, with PSP having the majority, in keeping with Canadian law.

Loral, which owns satellite builder Space Systems/Loral — a regular Telesat supplier — is trying to sell nearly 20 percent of the Palo Alto, Calif.-based manufacturer in a stock offering that was announced several months ago but appears not to have found sufficient market enthusiasm to proceed.

Industry officials said the Canadian regulatory change makes Telesat a much more attractive acquisition target, and Telesat’s recent financial performance has done little to turn away prospective investors despite the company’s high debt load.

Telesat is the world’s fourth-largest commercial satellite fleet operator when ranked by revenue.

The company, which operates 12 satellites and has three more on order, reported revenue of 614 million Canadian dollars ($596.5 million) for the nine months ending Sept. 30, a 4 percent increase over the same period a year earlier and a 9 percent increase if foreign-exchange effects are removed from the figures. The U.S. dollar declined relative to the Canadian dollar during the period.

But more than the revenue increase — which was helped by the October 2009 launch of the Nimiq 5 satellite, whose capacity was purchased in advance by EchoStar Corp. of the United States — it is Telesat’s gross profit margin that the company highlighted during the conference call.

Telesat’s earnings before interest, taxes, depreciation and amortization (EBITDA) was 76 percent of revenue for the nine months ending Sept. 30, compared with 70 percent of revenue for the same period a year ago.

Goldberg said there is no reason to think EBITDA margins cannot go higher still. The three satellites Telesat has under construction are scheduled for launch in 2011 and 2012. Given the amount of these satellites’ capacity that has already been sold, and the fact that Telesat’s operating costs should not otherwise increase, Goldberg said gross profit can climb higher.

The company reduced its operating expenses by 13 percent in the three months ending Sept. 30, and Goldberg said these costs should not be going up as fast as revenue as the new satellites are launched, leaving room for further EBITDA margin improvements.

Paris-based Eutelsat, which among the largest satellite fleet operators is the most heavily invested in television broadcasting as a percent of its total revenue, regularly reports EBITDA margins of 77 percent. SES of Luxembourg is also in that neighborhood.

Goldberg said 54 percent of Telesat’s revenue is from broadcasting, with 42 percent coming from enterprise networks and the remaining 4 percent from Telesat’s consulting business.

The company’s North American satellites were 87 percent full at Sept. 30, flat from three months earlier. The international fleet was 78 percent full, down from 79 percent at mid-year.

Telesat’s backlog on Sept. 30 stood at 5.6 billion Canadian dollars. Some 22 percent of it is for contracts to be terminated by late 2013. The remaining backlog relates to business after then. Telesat’s debt at Sept. 30 was about 2.9 billion Canadian dollars. Telesat Chief Financial Officer Michel Cayouette said during the conference call that Telesat would seek to restructure its debt in parallel with the review of a stock offering and other strategic alternatives.