|Shares Out. (in M):||31||P/E||0.0x||0.0x|
|Market Cap (in $M):||1,750||P/FCF||0.0x||0.0x|
|Net Debt (in $M):||0||EBIT||0||0|
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
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.
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.
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