Loral Space & Communication (NASDAQ:LORL) lost in a patent litigation asserted by ViaSat (NASDAQ:VSAT) last week. Even though Loral lost, it could lead to a win for Loral investors, as a potential transaction is likely around the corner.
While the $283 million jury award is not dispositive (yet), resolution of the Viasat patent matter removes uncertainty to a key variable -- that is, how much liability would a potential Loral acquirer be on the hook for based on a dispositive patent infringement ruling?
The Loral case has been particularly complex because it owns two key assets: (1) a 63% interest in Telesat, a Canadian fixed services satellite operator and (2) a 56% interest in XTAR (which is minor in terms of the value proposition).
By way of a quick background, Loral sold its satellite manufacturing unit, Space Systems / Loral to MacDonald Dettwiler and Associates ("MDA") in June 2012. Prior to that sale, in February 2012, ViaSat alleged SS/L stole certain patent designs and asserted certain breach of contract claims. As part of the purchase agreement, Loral and MDA agreed to certain liability sharing on a potential adverse outcome in the ViaSat offensive litigation.
Details of that liability share were not well disclosed in the purchase agreement, but we know now that Loral is on the hook for $200 million (maximum liability). Meanwhile, ViaSat is seeking a permanent injunction against SS/L to cease further manufacturing of satellites based on Viasat's designs. As a former patent damages consultant, I do not believe the permanent injunction will have any effect on Loral and that liability is now borne solely by MDA.
Now that we and potential acquirers -- reportedly Ontario Teachers' Pension Plan -- know Loral's maximum liability, I think this should pave the way for a sale of Telesat and, effectively, Loral. Telesat issued a press release indicating that it will hold a conference call on May 1 to discuss Q1 results and "other matters." One has to assume the "other matters" will be information on a potential transaction.
To make matters a bit more hairy, I understand that Loral and Telesat's other owner (with voting control), Canada Public Sector Pension Investment Board, have not been on the best of terms as the Telesat asset sale process unfolded over the last several months. In my view, any distaste between the two owners will likely have a positive impact -- a break up of the partnership through a sale of Telesat.
The only question now is price. Again, while the jury award is not dispositive, meaning, not final, we do know the maximum financial liability is $200 million. As a former patent damages practitioner, the Court of Appeals for the Federal Circuit ("CAFC"), led by Chief Judge Randall Rader, has shown a keen interest in dialing back specious damage awards based on spurious damage theses.
Here, the question likely will be the quality of ViaSat's experts' lost profit apportionment analysis. While I have not seen the report, the sheer dollar value of the award indicates that in a "but for" world, the damages expert and the jury assumed most, if not all, of Loral's offending sales and resultant profits would have accrued to ViaSat.
The key variables in this sort of analysis is what share of the offending sales would have been picked up by ViaSat, what ViaSat would have earned on those sales and, importantly, evidence that ViaSat had enough capacity to deliver on the extra business (if not, lost profits are not awarded). In my view, this is a fairly fragmented market and should include telecommunication providers such as AT&T (NYSE:T), Verizon (NYSE:VZ) and others when reconstructing the "but for" market share. That said, there likely is room for appeal and the possibility of a lower damages figure.
Resolution to the ViaSat patent matter should clear the way for Loral to be liquidated. The question is, at what price? The $200 million liability certainly cuts away at a potential sale price. In my mind, the deal comes down to what multiple the Ontario Teachers' Pension Board is willing to pay.
These fixed services satellite operators are characterized by high financial and operating leverage, perfect for leveraged buyouts with low cost money. My guess is that a go-private multiple for Telesat is likely in the 11x EV/EBITDA range, valuing the equity at $4.8 billion ($711 million TTM EBITDA less $3 billion net debt), making Loral's share worth about $3 billion, or $98 per share.
Recall from my prior narrative, that I valued XTAR at $2/share. Collectively, I think Loral could be worth up to $100 per share.
However, we do need to back out $200 million for the ViaSat liability, which I calculate to be in the $7 to $8 per share range.
Loral has been an event-driven investors dream over the last several years, as management has unlocked value in a variety of ways. It helped, too, that the business remained obscure and its value proposition hidden.
All told, I think Loral shareholders will get $90 (plus or minus $5/share) in a transaction, depending on what EV/EBITDA multiple is ascribed to Telesat in a potential deal.
Based on the current ~$73 share price, that is a pretty good risk/reward profile.
Disclosure: I am long LORL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.