Seeking Alpha

Loral higher following fresh Telesat deal report

  • Telesat owners Loral (LORL +4.1%) and Canada's Public Sector Pension Investment Board (PSP) are "attempting to bridge a $100 million value gap" to complete a deal to sell Loral's Telesat stake to the Ontario Teachers' Pension Plan, Bloomberg reports.
  • Loral, whose value is almost entirely derived from its 63% Telesat stake, is reportedly willing to sell itself for $85/share (a 14% premium from current levels).
  • But PSP, which owns 37% of Telesat and 67% of its voting rights, wants a Telesat valuation that's ~$100M lower than what Loral supports, since the sale effectively makes it a buyer. Talks are ongoing, and a deal might still happen in July.
  • Also complicating matters: Loral could be on the hook for $200M in legal costs related to ViaSat's patent suit against former subsidiary SSL. A jury awarded ViaSat $283M in damages in April.
  • Previous coverage: I, II
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Comments (3)
  • Chris DeMuth Jr.
    , contributor
    Comments (6307) | Send Message
     
    Loral is about to get its catalyst. We have been shareholders of Loral for a long time. Now is the time for MHR, the fund controlled by Loral’s chairman, to monetize its investment in Loral. Telesat’s value has more than doubled since its purchase. SSL has been sold successfully at a full (actually more than full) price. Loral has rationalized its headquarters. The stock market is at a high water mark. Telesat as the only real asset left in Loral. Telesat is a valuable asset as a cash generator in a market where people are paying dearly for yield.

     

    The price will be full. The value of an asset such as Telesat to a pension fund is worth 10 to 11x EBITDA including a control premium. The structure of the deal will be for the buyer to buy Loral as a whole getting them 63% of Telesat. The buyers left in the sale process are the best ones to assure that the deal goes through at a high price. This is the perfect pension fund asset. A Canadian buyer avoids all of the Non-Canadian control issues that are troublesome to Industry Canada. Canadian pension funds have a continual flow of cash to invest. The private equity funds dropped out when the price rose above $80 because the pension funds are willing to accept a lower risk/lower return asset than suits PE buyers. This includes a cap on the liability that the buyer is accepting for the outcome of the ongoing lawsuit between Viasat (VSAT) and Loral. If Loral exits the suit cleanly, the value of the deal could be greater. We would not support a sale for a price under $85 per share.

     

    What will happen next? The buyers are working out a deal with Telesat’s other owner, the Canadian pension fund Public Service Pension. PSP would not have to sell and does not want to sell all of their position. They have worked out the likely buyer, the likely price, the contract specifics, the liability issues, and the tax considerations. Only the issues between Loral and PSP remain.

     

    What is the downside, upside, probability, and timeline? The fundamental downside for Loral without a deal is around $65. The value in a deal is around $85. The probability of a deal this year is around 95%. A deal could be announced in early Q3, 2014 and closed by the end of Q1, 2014. Weighted for risk and the time value of money, Loral is still cheap by almost $10 per share. It is not as cheap as its bank debt at 10% of par during bankruptcy, but it is a safe and sensible investment that is likely to work this year.

     

    For prior writing on this topic --

     

    Best Opportunities for 2010, Dec. 18, 2009: http://bit.ly/1oWJ7ED
    One Last Bite At The Apple With Loral, Dec. 21, 2012: http://bit.ly/1tIMOf1
    Loral Launching Into Orbit, Dec 12, 2013: http://bit.ly/1hzulBJ
    Chris DeMuth, Jr. Positions For 2014: Certain Industries Are Ripe For Consolidation, Dec. 23, 2013: http://bit.ly/PZAQk0
    Loral Updates Transaction Disclosure, Mar 4, 2014: http://bit.ly/Uchw63
    Reading Between Between The Lines, Apr 25, 2014: http://bit.ly/1mLIWLk
    Comments on LORL: http://bit.ly/1nfN7wX
    StockTalks on LORL: http://bit.ly/1p7b2zj
    Posts on LORL: http://bit.ly/1pRLcze
    4 Jun 2014, 03:21 PM Reply Like
  • Spidron
    , contributor
    Comments (27) | Send Message
     
    Well said, Chris.
    4 Jun 2014, 05:57 PM Reply Like
  • Toby Shute
    , contributor
    Comments (150) | Send Message
     
    Game off for now?

     

    http://reut.rs/1wpeWXQ
    23 Jun 2014, 07:02 PM Reply Like
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