Telesat Says It Has Buyer for At Least One of its Satellites

PARIS
— Satellite-fleet operator Telesat, after a months-long search, has found a prospective buyer for one or possibly two of its Skynet satellites that already are in orbit, but with coverage that is outside Telesat’s home North and South American markets.

If accepted, the $200 million bid would enable Telesat, the world’s fourth-largest satellite-fleet operator in revenue terms, to accelerate the reduction of its large debt load, Telesat and industry officials said.

Disclosing the bid in a Nov. 10 conference call with investors, Telesat Chief Executive Daniel S. Goldberg said the spacecraft covered by the bid generated 7 percent of Telesat’s total revenue for the nine months ending Sept. 30, or 35.3 million Canadian dollars ($29.7 million).

Goldberg declined to name the prospective buyer and cautioned that the deal could fall through.

One industry official said Hispasat of Spain, a highly profitable regional fleet operator that already has expanded from
Europe
into
South America
, had expressed an interest in picking up the Telesat spacecraft and associated orbital slots. Hispasat officials did not return requests for comment.

Telesat
currently operates 13 satellites, including four spacecraft the company took over as part of its mid-2007 purchase by New York-based Loral Space and Communications and
Canada
‘s PSP Investments pension fund. Loral has a majority economic ownership; PSP has majority voting rights.

Goldberg said one of the satellites up for sale is nearing retirement and that Telesat will need to decide in 2009 whether to replace it at a cost of between $200 million and $300 million.

Of the four Loral-heritage Skynet satellites, Telstar 10, launched in 1997, fits that description. Located at 76.5 degrees east, Telstar 10 covers
East Asia
.

Despite its high debt level, Telesat is not in poor financial shape. It continues to generate substantial cash and is about to end a heavy capital-expenditure cycle. Two of its new satellites, the Nimiq 4 launched in September and the Nimiq 5 set for launch in mid-2009, are expected to be particularly strong cash generators.

Both Goldberg, in his Nov. 10 conference call, and Loral Chief Executive Michael B. Targoff, in a Nov. 11 conference call, referenced a Goldman Sachs report saying that Nimiq 4 and Nimiq 5, both already booked by television broadcasters, will generate between 65 million and 70 million Canadian dollars per year in revenue, with EBITDA margins of 90 percent. EBITDA, or earnings before interest, taxes, depreciation and amortization, is a commonly used financial metric among satellite operators.

By comparison, Telesat’s fleet-wide EBITDA margin was 64 percent as of Sept. 30, up from 61 percent three months earlier.

Goldberg said the Goldman Sachs estimate “is certainly in the right ballpark.”

Targoff
said Telesat, which has about $2.9 billion in debt, is expected to generate $200 million more in cash in 2008 than it needs to finance its debt.

In the three months ending Sept. 30, Telesat paid around $70 million in interest on its debt. Targoff said the cash flow should permit Telesat to trim its debt to around six times its EBITDA by the end of the year.

Telesat’s
debt service is the main reason why the company reported a net loss of 151 million Canadian dollars on revenue of 504 million Canadian dollars for the nine months ending Sept. 30.

Echoing comments made by other satellite-fleet operators, Goldberg said the current satellite transponder-lease pricing environment remains stable. Telesat’s fleet, including the four Skynet satellites plus Telesat’s core Nimiq and Anik spacecraft over North America, was 82 percent filled as of Sept. 30.

Despite its majority economic stake in Telesat, Loral is now mainly a satellite manufacturing company. Its Space Systems/Loral subsidiary in Palo AltoCalif., has long specialized in commercial telecommunications satellites.

Targoff
said Loral has booked contracts to build seven satellites this year, including two whose owners have not been identified. Intelsat of Washington and
Bermuda
is one of the two, ordering the Intelsat 17 satellite for launch in late 2010 to replace the IS-704. The other buyer remains unknown, with several industry officials saying they were stumped as to who it might be.

The new orders helped push Space Systems/Loral’s backlog to $1.42 billion, up 40 percent from Dec. 31. But Loral’s share of Telesat’s losses and foreign-exchange losses combined to give parent company Loral a loss of $81.8 million on revenue of $1.16 billion for the first nine months of 2008.

Targoff
said the company has invested $350 million into Space Systems/Loral over the past two years to put the company in a position to process nine large telecommunications satellites a year. Starting in 2009, he said, that investment will shrink to no more than $30 million per year.

Targoff
said Loral is concerned that about $60 million it is owed by customers on tenuous financial ground may be at risk. He also warned investors that, as Loral’s order volume grows, so will the amount of receivables on its books.

It is customary for satellite manufacturers to permit customers to defer paying around 10 percent of the cost of the satellite until the satellite is healthy in orbit. At that point, the customer makes annual payments as long as the satellite remains healthy during the satellite’s 15-year life.

Targoff
reminded investors that, while he did not like the arrangement, there is no way around it if a company wants to stay in the business.