|Shares Out. (in M):||31||P/E||0.0x||0.0x|
|Market Cap (in $M):||1,800||P/FCF||0.0x||0.0x|
|Net Debt (in $M):||10||EBIT||0||0|
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Loral is a long – as shares have upside towards more than $75 through the (now) inevitable monetization of Telesat. Previous write-ups (I have one on a related site) at much lower values focused on a fundamental mis-understanding of Loral’s asset base (given the 64% stake in Telesat was accounted for using the equity method, and hence somewhat hidden from investors). That dynamic has now corrected, and shares are up meaningfully, but continue to offer attractive risk-adjusted returns.
Given the recently closed sale of SS/L (for a value much higher than I expected), the corporate structure is much simpler, and the path is set for an exit. The recent pulling of PSP’s recent demand right regarding an IPO is a red herring for a sale (i.e. Telesat is likely exploring a sale in 1H 2013). Given (i) timing (2007 LBO – likely one of the most successful LBOs in Canadian history), (ii) a simplified corporate structure (much easier for Loral to monetize Telesat via HoldCo sale given SS/L is gone) and (iii) operating momentum (Telesat will now get credit for Telstar 14-R, Nimiq-6, Anik G-1 and ViasSat-1, even while Nimiq-1 contracts a bit more) I think a sale can fetch north of $6.5bn. In fact, I think a deal happens much closer to $7bn, given where real-time operating metrics have gone and are going. The home-run possibility exists for a merger whereby Loral shareholders share in operating synergies (which tend to be quite material and tangible in this sector). Downside should be muted (outside of mark-to-market given liquidity) given (i) operating performance trends and (ii) a nearing, inevitable end-game. Upside is closer to $75 in my view.
The investment thesis; once overly complex, is now broken into two key points:
Pro Forma Valuation
Loral announced and paid a $29 special dividend in December (sale proceeds from the sale of SS/L), so the below balance sheet is pro forma. While there are still several moving pieces, they are less material to the end-game. Given recent & upcoming contracted (for life) launches, I think near-term EBITDA visibility is quite high. L2QA run-rate EBITDA is $694mm, while LTM EBITDA is $655mm (you can see material growth in 2H 2012). No idea how they ‘market’ this asset, but I would expect 2013E projections of something close to $730-740mm.
Target EBITDA multiples are inherently subjective and will almost certainly be ‘wrong’, however, a few things to come mind:
9.5x EBITDA does not yet begin to consider a potential merger, whereby Loral shareholders can share in operating synergies. Operating synergies have been meaningful in this industry (Skynet / Telesat saw ~$60mm in operating synergies, while Intelsat / PanAmSat saw >$100mm in operating synergies). This type of structure would be pure upside, so not something I’m counting on but certainly reasonable (the business would fit nicely with either SES or ETL FP).
Regarding timing, I would expect a deal in the next six to nine months. Mickey Targoff and the Loral management team now have a rather simple mandate – monetize Telesat (they are effectively dissolving the holding company).
If not, at an 8% trailing or almost 15% forward free cash flow yield, I think you’re (more than) happy to own the business here, and compound value. I’m happy to share additional details or thoughts regarding modeling or assumptions, if people care.
|LORL - Updated Valuation Summary|
|voting shares||21||MHR, Highland, Solus, Echostar|
|non-voting shares||10||all owned by MHR|
|pro forma market cap||1,800|
|pension / OPEB liability||25||stayed with LORL post SS/L sale|
|taxes payable||35||ignoring deferred tax assets for now|
|other current liabilities||37||includes employment-related expenses|
|one year of corporate overhead||7||net of Telesat consulting fees, pro forma for the sale of SS/L|
|cash||(87)||as of Dec 31|
|SSL land note||(102)||three year promissory note issued in connection with the sale of SSL real estate|
|XTAR value||-||$65mm investment (56% of XTAR) carried at zero (option value remains)|
|implied Telesat value||1,810|
|C$ / US$||1.000x||for simplicity's sake|
|implied Telesat value in C$||1,810|
|Telesat ownership||63%||pro forma for option exercises|
|implied total equity value||2,882|
|Telesat cash||(181)||in C$, as of Q4 2012|
|Telesat debt||3,508||in C$, as of Q4 2012|
|implied Telesat EV||6,209||PSP preferred equity is now gone|
|implied EV / EBITDA||9.5x|
|implied EV / EBITDA||8.9x|
|targeted near-term EBITDA||750|
|implied EV / EBITDA||8.3x|
|rough target price math|
|target EBITDA multiple||9.50x|
|target Telesat EV||6,888||bid / ask from 2010 / 2011 was ~$6-7bn enterprise value|
|target Telesat equity value||3,561||but Telesat will have launched three satellites, plus Anik G-1 in mid-2013|
|value per LORL share||2,236|
|incremental value per share||$13.86|
|upside / (downside)||24%|
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