Canadian space technology firm MacDonald, Dettwiler and Associates (MDA) has signed an agreement to acquire satellite manufacturer Space Systems Loral for US$875m in cash. The purchase prices represents an acquisition multiple of 5.7 times SS/L’s 2011…
Canadian space technology firm MacDonald, Dettwiler and Associates (MDA) has signed an agreement to acquire satellite manufacturer Space Systems Loral for US$875m in cash.
The purchase prices represents an acquisition multiple of 5.7 times SS/L’s 2011 EBITDA.
Under the terms of the transaction, MDA will purchase all of the equity of SS/L from parent company Loral Space & Communications for US$774m in cash. MDA will also purchase certain real estate used in connection with SS/L’s business for US$101m, payable through a three-year 1% Land note from Loral.
In addition, Loral will receive cash dividends and other payments from SS/L that are expected to be in excess of US$135m. This comprises SS/L’s US$112m of cash balances as 31 March 2012, and an incremental per diem amount of US$5.8m per month from the end of March to the closing date of the transaction.
The boards of directors of MDA and Loral have each unanimously approved the terms of the agreement and the transaction is expected to be completed in a few months subject to applicable regulatory approvals and certain closing conditions.
To fund the deal, MDA plans to use US$260m cash on hand, the US$101m promissory note and approximately US$514m of borrowings under a new C$1.1bn fully committed and underwritten credit facility from RBC Capital Markets. The facility also has an accordion feature to borrow an additional US$250m.
BofA Merrill Lynch is lead financial adviser to MDA in connection with the transaction, while RBC Capital Markets also provided financial advice. Credit Suisse and JP Morgan were financial advisers and Willkie Farr & Gallagher legal adviser to Loral.
MDA’s commercial move
For MDA, the transformational deal gives it global scale in the commercial satellite manufacturing sector as well as a far stronger presence in the US market.
While the Canadian company has increased its work in the commercial space industry, most recently being selected by Israel Aerospace Industries to supply the communications payload solution for the AMOS-6 satellite, it has traditionally focussed more on the governmental market.
The SS/L acquisition will significantly change that. According to a Futron satellite orders report, SS/L has been awarded more commercial satellite contracts worldwide than any other company since 2005.
SS/L revenues for 2011 were US$1.1bn, with pro-forma operating EBITDA of US$153m. SS/L has a backlog of US$2 billion as of 31 March 2012.
Commenting on the transaction, Daniel Friedmann, MDA’s president and CEO, said: “This is a game changing transaction for our company. With one move, we are bringing together two market leaders to create a unique global communications and information company with a strong commercial focus. Post-acquisition, more than two-thirds of MDA’s total revenues will come from the commercial market.”
MDA stated that the transaction is immediately accretive and that following the acquisition, the combine d company will have annual revenues of C$1.9bn (calendar year 2011), and a combined backlog of C$2.8 billion (March 31, 2012).
Anil Wirasekara, MDA’s executive vice-president and CFO, said: “This transaction is structured to provide MDA with a full tax step-up for the purchase price for US tax purposes and the transaction is also immediately accretive to MDA’s earnings per share.
“Post-transaction, MDA will maintain a prudent leverage ratio (of 2.2x EBITDA) and will continue to have more than adequate capital to fund further growth opportunities.”
MDA said its valuation of SS/L was based upon a business value of US$550m, a US$120m tax step-up and US$337m of orbital incentives. Against this was US$132m of pension liability.
Sale brings an end to 2 year wait for Loral investors
As for SS/L and its parent company Loral, the strategic sale brings an end to a period of relative uncertainty over the future ownership of the satellite manufacturer.
In early 2010, Loral announced that it was seeking to list 19.9% of SS/L via an IPO and mandated Credit Suisse and JP Morgan to manage the process. At the time, sources told SatelliteFinance that the two banks were also sounding out potential buyers over a full sale.
However, when Loral’s other significant holding, the Canadian satellite operator Telesat, revealed that it had begun a sales process, Loral subsequently announced that it was seeking to spin-off SS/L in order to aid the process.
In August 2011, Telesat then announced that it had ended sales talks and instead planned to undertake a recapitalisation transaction. That process eventually took place in March 2012 and led to the company paying its owners, Loral and Canadian pension fund PSP, a special dividend of C$705m (of which it has so far distributed C$586m).
In the same month, Loral CEO Michael Targoff told investors that the company had suspended plans to spin off SS/L and was now engaging in an alternative transaction.
Targoff said that “another strategic alternative has now arisen”, which now turns out to be a sale to MDA.
Loral’s investors will now look forward to another bumper dividend. Having paid its shareholders a special dividend of up to US$420m following the Telesat recapitalisation, the Loral board of directors are now planning to use the after-tax proceeds of the SS/L sale to pay a dividend of approximately US$26 per share.
In addition, under the terms of the purchase agreement, Loral will also retain control of the pending lawsuit against SS/L by ViaSat, as well as Loral’s countersuit.
For SS/L, the merger with MDA is a good strategic fit, with little competition between the two. It also gives SS/L greater visibility over its future ownership and the ability to further scale up the business.
As part of the acquisition, the existing SS/L management team will join MDA.
John Celli, president of Space Systems/Loral said: “The combination of Space Systems/Loral’s world-class commercial communications expertise with MDA’s strengths in essential information solutions provides exciting opportunities for growth for the new company and continuous strong support to our current and future customers’ business.”
