Description

Investment Thesis

Loral Space & Communication (LORL) is a special situation value equity that is majority owned (57-58%) by MHR Fund Management (MHR).  The company has announced that it is looking at strategic alternative of a spinoff of its business lines.  Our valuation shows a break-up price of between $75-$95 dollars a 25% upside from the current price of $57.  The stock is illiquid and thin for a $2 bil. market cap company as majority of the stock is held by MHR.  The corporate catalyst should be in 4Q 2011. 

LORL Business Description

• LORL is a satellite communications company with two major divisions:
• § 100% ownership of a Space Systems/Loral (SS/L), a satellite manufacturing business
• § 64% economic stake in Telesat, a fixed services satellite provider.

SSL

• SS/L designs and manufactures satellites, space systems and space system components for commercial and government customers whose applications include broadband data distribution, wireless telephony, digital radio, digital mobile broadcasting, military communications, and air traffic management.
• SS/L's customers include DirectTV, Dish Network, EchoStar, Sirius XM Radio, and Hughes Network Systems.
• Since its inception, SS/L has manufactured approximately 230 satellites and can currently manufacture approximately 13 satellites per year.

Telesat

• Loral also has a 64% economic and 33.3% voting stake in Telesat Holdings, a Canadian incorporated company, with a subsidiary of Canada's Public Sector Pension Investment Board (PCP) owning the balance of the economic and voting interests.
• Telesat is the fourth largest fixed satellite services (FSS) provider in the world with 12 in-orbit satellites, and 2 additional satellites under construction.
• The company provides high-bandwidth video and end-to-end communications services using both satellite and hybrid satellite-ground networks. Telesat's main competitors are SES (SESG EU), Eutelsat (ETL EU), and privately-held Intelsat.

LORL Valuation

Telesat Valuation

SS/l Valuation standalone

LORL Valuation w/ standalone SS/L

  The satellite manufacturing business is concentrated in large well capitalized business defense business - Boeing, Lockheed Martin etc. with Orbital Science Corporation as the only standalone publicly traded comp.  There should be natural buyers of SS/L in the strategic defense firms where lump revenue/contracts that SS/L receives should not be a negative.  This business is best owned inside an integrated aerospace firm.

The fixed satellite services business is highly concentrated within 4 firms.  The barriers to entry (costs, regulatory) and growth of satellite services via satellite radio, gps and other new technologies creates a strong operating and high EBITDA margin environment.  Both of publicly traded comps trade at 9-11 multiples.  This is an industry in which private equity have been an active player - Intelsat the second largest satellite firm is owned by BC Partners and Silverlake.  The press reports are that Intelsat dropped out of bidding for Telesat based on antitrust fears.

Blackstone, KKR, Providence Equity Partners and Carlyle were said to be interested in LORL.     

MHR has its franchise bet on LORL - Mark Rachesky has taken significant risk investing in LORL across multiple funds and accounts.  MHR is in the sunset provisions of MHR Fund II a 2002 vintage fund.  LORL/MHR is highly incentivized to monetize and realize value within the next 3-12 months.  So as equity holders there is an alignment of interest between us and MHR on value realization and monetization.  

Risks

LORL Stock Thinness

Given ownership by MHR, EchoStar, Solus and Highland Capital nearly 80% of the stock is hands where it does not actively trade.  The average trading volume is under 70K shares.  The stock moves $1 or over 1% on intraday buying and selling with zero liquidity to capture the price volatility. 

The exit from this position is the corporate event.  The lack of liquidity and the open ended nature of corporate event results in few traditional arbitrage players in the name.

This position has mark to market risk and lacks liquidity.  Its trading shows the attributes of a micro-cap with a $2 bil. market capitalization.   

Operational Risk

Satellites are complicated instruments operating in space (inhospitable environment); there is always a possibility of operational risk with satellites either in operation or in transit to operations (launch). 

Telesat has a portfolio approach with 14 satellites operating.  A single failure can be a painful onetime event but the business model is built on portfolio diversification.  

Telstar 14R Example

• One of two power-producting solar panels on the Telstar 14R communications satellite launched May 20, 2011 failed to fully deploy, potentially limiting the craft's planned mission to link North and South America
• The satellite's north solar array did not fully extend after launch. Telstar 14R's south solar panel deployed normally is generating electricity.
• Telstar 14R was built by Space Systems/Loral of Palo Alto, Calif. The satellite is also known as Estrela do Sul 2, meaning "southern star" in Portuguese, because one of its primary coverage zones is over Brazil.

• Telesat says the spacecraft is "stable and is otherwise operating as expected," and the satellite manufacturer is analyzing data to determine what steps are necessary to overcome the deployment anomaly.
• If controllers are unable to resolve the problem, Telesat expects the satellite will support all the existing services provided by Telstar 14, the craft it was supposed to replace.
• Telstar 14, also called Estrela do Sul 1, launched in 2004 but was stricken when its north solar array also failed to fully deploy in space. Telstar 14 has been operating only a fraction of its communications payload since then, and Telesat ordered Telstar 14R to replace and expand service from its orbital location in geostationary orbit at 63 degrees west longitude.
• Telesat expected Telstar 14R would more than double the communications capacity of Telstar 14. With five beams and 46 Ku-band transponders, Telstar 14R's coverage was to be focused on Brazil, with additional coverage of the Atlantic Ocean, the Andean region and Central America, the southern cone of South America and the continental United States.
• Telstar 14R launched aboard a Proton rocket from the Baikonur Cosmodrome in Kazakhstan. The launcher propelled the satellite into an accurate orbit, releasing the craft more than nine hours after liftoff to conclude a successful mission.
• A subset of Telstar 14R's transponders have the ability to switch between coverage zones, giving Telesat flexibility to respond to changing market demands.

Catalyst