A hedge fund with nearly 10% of Loral Space & Communications’ voting stock has slammed the company for entertaining a sale at US$80-85 per share, describing it as a “miniscule” premium.
The talks with the Ontario Teachers’ Pension Fund and…
A hedge fund with nearly 10% of Loral Space & Communications’ voting stock has slammed the company for entertaining a sale at US$80-85 per share, describing it as a “miniscule” premium.
The talks with the Ontario Teachers’ Pension Fund and Canada’s Public Sector Pension Investment Board (PSP) reportedly broke down after Loral balked at a US$300m consent fee to get the deal done.
Loral derives most of its value from its 63% stake in Telesat, and PSP had reportedly demanded the fee because it owns the rest of the Canadian satellite operator, as well as two-thirds of its voting stock, although the deal Ontario would see it increase its ownership to 50%.
However, Highland Capital Management said the group should have balked first at the price, with a US$80 per share offering representing about a 10% premium over Loral’s recent stock price.
“Even worse, according to the public reports, it was not a special committee composed of independent Loral directors that balked, but Loral’s largest stockholder, MHR Fund Management (MHR),” it said in a letter yesterday.
“Given MHR’s history with Loral and the fact that the apparent stumbling block in the deal negotiations with Ontario/PSP is the PSP consent fee, Highland is very concerned that the resolution of the impasse will not be an increase in the per-share consideration to Loral or eliminating the PSP consent fee, but rather a payment to MHR (perhaps disguised as an advisory fee or something similar), not shared pro rata with Highland and Loral’s other public stockholders, that softens the dilutive impact of the PSP consent fee to MHR.”
The hedge fund said there should be no urgency to sell Loral, unless there is a hefty premium, because it gets significant free cashflow each year through its Telesat stake.
In the last 3.5 years, it said this has amounted to more than US$844m, of which nearly a half has been returned to stockholders.
Loral also owns 56% of XTAR, a joint venture it shares with Spanish satellite operator Hisdesat that offers X-band services to government customers. It sold its Space Systems Loral satellite manufacturing subsidiary back in 2012 to MacDonald, Dettwiler and Associates for US$875m.
“If Loral is able to grow its earnings by a modest six percent in 2014 and Loral uses its substantial free cash flows to pay down debt, public analysts report that Loral will be worth US$105 per share by the end of this year,” said Highland.
“Highland’s valuation analysis is consistent with this projection and demonstrates further significant growth prospects for Loral’s equity value during 2015. In brief, simply maintaining the status quo at Loral will deliver significantly more value to Loral’s stockholders than the proposed US$80-85 per Loral share transaction price to be paid by Ontario/PSP based on the public reports.”
The hedge fund called on Loral to either confirm a committee of independent directors has been set up to vet any deal, or to create one.
It has a history of being an activist investor, and has launched legal action against Loral over shareholder disputes in the past.
Responding to the letter on 5 August, Loral said all its stockholders will receive the same per share consideration from the current process, if consummated.
“The Board is being advised by independent counsel and financial advisers and is well aware of its fiduciary duties to all of Loral’s stockholders, including the need, where appropriate, for a committee of independent directors,” it said.
Credit Suisse is reportedly advising on the sale of Loral, and its process is thought be running alongside Morgan Stanley’s attempt to find a buyer for Telesat.
