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Optimism Remains For Near-Term Loral Sale

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Selling Loral Space & Communications, or Loral’s largest holdings, the privately held satellite operator Telesat in Canada, is a daunting task. It means getting Telesat’s investors, Loral and PSP investments, on board, as well as MHR Fund, headed by investment chief Mark Rachesky.

Despite a report on June 24 indicating a sale of Loral has fallen through, some investors remain optimistic about the potential of a near-term deal. If the report is accurate, it would be the second formal failed auction of Loral or Telesat, on top of a couple informal attempts at a sale, according to a source familiar with the matter.

The report said Loral rejected a $7 billion offer from Ontario Teachers’ Pension Plan over a price gap that earlier reports pinned at $100 million. A second source familiar with the matter told me the figure was higher at $200 million. Even so, it’s a small gap in the world of billion dollar deals.

The first source said PSP had no incentive to negotiate any offer that saddled Telesat with a less favorable financial structure than it has at present, since the Canadian pension fund’s intention was to hold its stake after a recapitalization. The first source added that he’d known “Rachesky to walk away from deals for smaller gaps than $100 million” and the impasse may drag on.

Still, a Loral investor remains “optimistic,” he said, about a near-term Loral sale because interest rates are low and a price between $7 billion and $8 billion could be the “most Loral ever gets.” He noted too that Wall Street seemed relatively unmoved by the report of the rejected deal, the stock of Loral only falling 4% at its lowest on the day the report was published,  and nearly recovering since that time.

An industry source pointed out that, “even if a deal’s dead today, that doesn’t mean it’s dead tomorrow.” If MHR, which became Loral’s controlling shareholder when it emerged from bankruptcy in 2004, has need of funds to use in new investments, it has incentive to sell sooner rather than later.

Perhaps the best argument in favor of believing a sale of Loral or Telesat could still be a year or two away is that, as I reported in BrightWire, PSP intends to hold its stake in the Canadian company. PSP appears to have changed its mind since Telesat’s 2011 sale attempt, when according to rumors, it wanted to sell and MHR held out for a higher price, then rumored to be $6 billion. Several of the sources agree that Loral and its operating entity Telesat could be worth more in a year or two because pricing has grown more favorable and Telesat’s a strong business that’s generating cash.

Telesat reported an 11% increase in revenue for the quarter ended March 31, 2014 to CAD 242 million, and a shrinking net loss of CAD 28 million, compared to a net loss of CAD 97 million for the comparable quarter of 2013.

Telesat has a complex ownership structure, in which Loral owns two third of the company but one third of the voting rights. PSP owns two thirds voting rights and one third financial ownership, to comply with ownership regulations in Canada. MHR owns a controlling interest in Loral.

Spokespeople for Telesat, MHR and Ontario Teachers’ Pension Plan declined comment. Loral and PSP did not return phone calls.