The past year has seen some significant developments for Loral Space & Communications. Canada-based satellite operator Telesat, in which Loral holds a majority stake, has begun and then ended a potential sales process and is now eyeing a…
The past year has seen some significant developments for Loral Space & Communications. Canada-based satellite operator Telesat, in which Loral holds a majority stake, has begun and then ended a potential sales process and is now eyeing a recapitalisation, while satellite manufacturer Space Systems Loral is set to be spun off from its parent company. In the background to these potentially major transactions, both companies have continued to show stable revenue growth.
In a rare interview, Michael Targoff, president and CEO of Loral, spoke to SatelliteFinance editor Ed Ansell about both the ongoing Telesat and SS/L transactions, what Loral might do with the recapitalisation dividend, if market conditions allowed such an arrangement to take place, and the company’s plans for the future.
Ed Ansell: Why did the Telesat sales process come to an end, was it a difference over valuation?
Michael Targoff: We had to choose between the benefits of ownership versus the rewards of selling. Notwithstanding the level of price that has been rumoured, we made the decision that continued ownership and the prospects of that was a better alternative for our shareholders.
EA: What then is the future plan for Telesat beyond the recapitalisation? Will it be continued ownership, will you look to be more expansionary to grow the business?
MT: We are always looking at expansion opportunities that make sense. Some companies, when they consider the potential of a sale pull back their growth initiatives; we certainly never did that at Telesat. So we will continue to support the growth initiatives that the excellent management can come up with, I wouldn’t see any change in that at all. And then we will, at the right time, consider exploring strategic alternatives as they arise.
There was nothing set in concrete either that we had to sell or that we wanted to sell, it was all a function of serendipitously what’s the best thing for the owners.
EA: To that end, in a previous conference call you said that there was wasn’t any time pressure to get a deal done. Was this partly due to the ongoing strong performance of the company?
MT: We were in the situation where we were thinking of strategic alternatives and one of them that was worth exploring was could there be an effective sale of the company versus the benefits of continued ownership, so we explored that. It was the prudent thing to do and from time to time it may be prudent to do. But there was no time frame.
EA: So Loral didn’t have any pressure from its shareholders? MHR Fund Management, for example, is a fund and therefore will need to see a return on its investment at some point.
MT: We’ve said all along that there was no pressure from MHR or other shareholders that drove the consideration. In terms of return on investment, we are a public company, so MHR can do what they need to do.
EA: But as a majority shareholder, MHR must have an influence on the board?
MT: Well they have directors on the board; they have the majority of the equity ownership of the company (around 58%) but only 37% of the vote. We respect the importance of their considerations as you would any major shareholder.
EA: Regarding the potential dividend policy in light of the expected recap, Loral itself hasn’t traditionally paid a dividend, is that likely to change after this?
MT: I don’t believe Loral Space & Communications has ever paid a dividend. I have said publically that generally when you get a recapitalisation type of distribution, there are three potential things that you could do with the money.
One would be a dividend to your shareholders. The second alternative might be to buy some of your stock back. But both of those are really subservient to the third choice – whether you have a corporate growth strategy that could utilise the funds to further create value more so than giving the shareholders the first or second option. So we would look at all those things.
EA: So with the growth strategy being the most important of the three, and driving the other two in many ways, what would that strategy be? And would it be for both Telesat and Space Systems Loral?
MT: It could be anything. Loral has resources – the question is what it should do with them. The first thing we have got to look at is can we deploy the resources to benefit the shareholders more so than giving the resources to the shareholders. So it could be Telesat related, it could be SS/L related, or it could be an alternative.
EA: And is this something you have looked at for a while or since the recap was announced?
MT: All companies generally look at their strategic alternatives for investing capital for growth at all times. Look at the example of the transaction we did with the ViaSat-1 satellite. That was an ad hoc opportunity to invest capital in ways that were very effective for Telesat and for SS/L.
EA: Was that an opportunity influenced by your being on the board of ViaSat?
MT: No, I did not utilise my ViaSat board relationship to create the opportunity. They had great trust in my integrity and in my bona fides in saying what Loral would be interested in doing, and I did as well with ViaSat. So that fosters good business transactions but it wasn’t in any way shape or form because I was a director, in fact I had to recuse myself from all considerations.
EA: The potential spin-off transaction of SS/L was connected with Telesat, although the IPO plan was filed before the announcement of the Telesat process. There has been a statement since saying that Loral is still looking at those potential options, is that right?
MT: No, I think the most current disclosures are that we have made the IPO potential a secondary consideration, if at all, and we are focussing primarily upon the spin-off of the company. There was a time when the spin-off of SS/L, in terms of corporate purposes, was a necessary ingredient in making the sale of Telesat an efficient transaction. However, if Telesat is not being sold, then the motivation of a spin would not be driven because of Telesat. There has been no change in our position since the last statement.
EA: What is the main reason for the spin-off? Is it a tax related deal?
MT: If the spin-off had been associated with the Telesat transaction it could not have been tax-free. We’re doing a lot of work associated with the potential of this spin off, absent the Telesat sale, in ways to maximise the opportunity to do it as tax efficiently as possible.
EA: Beyond the tax-free nature of the transaction, what are the other benefits of the spin-off?
MT: SS/L has been very successful. It has a strong backlog, a wonderful customer base and we’re pleased with its position in the marketplace. I have felt that having SS/L’s future be dependent upon what we were doing with Telesat was no longer justified given the stature of SS/L. And SS/L being a stand alone company with the ability to use its equity if appropriate, the ability to raise money on its own and the ability to attract talent on its own are all factors that in addition to the tax efficiency of the transaction, are important considerations.
EA: How do you foresee the future performance of SS/L, do you see it as a solid growth opportunity continuing to drive revenue?
MT: We’ve tried to give as much guidance as possible without predicting numbers and we’ve said that we believe that the pipeline of opportunities both apparent and that are expected is good. Our strength is in what we call our sweet spot – high power satellites. Our efficiency, our reliability and our customer relationships as well as our entrepreneurial flexibility and capability have all served SS/L well. I would hope that we would continue to do that.
Whether the demand for commercial satellites continues, such as with the prospect of broadband satellites potentially generating another leg-up in demand, happens or not, SS/L should remain a very successful company. Will it be able to show the kind of growth that it has in the past few years? If the market for satellites is flat, we are going to have to get growth some place else as our market share is already quite high. So we will have to see where that is, it may be in broadband, it may be in some entrepreneurial activity, it may mean having a more meaningful position in the defence/ institutional government market.
EA: Is that an area that you think you can tap a lot more in the future – the government market?
MT: We have so little that we are hopeful that with the government recognising the efficiencies of commercial procurements we will be in a meaningful position.
EA: What about SS/L’s utilising ECA funding in its RfP bids? It seemingly hasn’t sought to do as much as its rivals
MT: We’ve had quite a few transactions, SatMex, Telesat, Hispasat, where the US ExIm Bank has supported us. So we’ve seen great support from our ECA and do not think that it is a meaningful competitive disadvantage.
EA: How long do you think export credit backed deals will last, given the governmental budget push backs and congress potentially cutting ExIm’s funding?
MT: I think it is important for our government to support industry, just as it is in Europe. I would hope that they would recognise that whatever the costs associated with ExIm is more than justified by the benefits.
