Responding to a complaints from a pair of investors, Loral Space & Communications Inc. and its largest shareholder will consider alternatives to a recent equity financing deal.

Loral asked MHR Fund Management LLC for alternatives to the $300 million deal that would include the participation of all interested shareholders, and MHR is developing a response, Loral announced Oct. 27

Investment firms Highland Capital Management LP and Murray Capital Management Inc. had raised concerns over the MHR deal, labeling it a "sweetheart deal" that would allow a "stealth take-over" of Loral.

Loral announced Oct. 17 that it would sell $300 million of stock to MHR, which was founded by Mark Rachesky, chairman of Loral’s board.

"As a significant shareholder of Loral, I would welcome any initiative or proposal which would insure to the benefit of all stockholders. I cannot support, however, the MHR transaction, which is nothing more than a blatant attempt by Loral’s chairman, Mark Rachesky, and MHR to acquire control of Loral to the detriment of the other shareholders," Marti Murray, president and portfolio manager of Murray Capital, wrote in an Oct. 25 letter to Loral’s board.

Under the agreement, MHR would purchase $41 million and $259 million of new Loral Space & Communications Inc., 7.5 percent Series A and Series B convertible perpetual preferred stock, respectively. Each such share of preferred stock is convertible into 10 shares of Loral Space & Communications Inc. common stock or Class B common stock, each at an initial conversion price of $30.15 per share of common stock. Under the agreement, MHR also will have the right to nominate one new member to Loral’s board.

"An equity investment of this size is an extraordinary achievement for Loral and it strengthens our ability to play an enhanced role in the satellite industry. We are grateful for MHR’s confidence and support and for the efforts of the special committee," Michael Targoff, Loral’s CEO, said in a statement announcing the deal.

That view was not shared by Highland Capital and Murray Capital.

"The convertible stock that Loral has agreed to sell to MHR was never offered to or discussed with [either] the market at large or other significant stockholders of Loral to determine if better market terms might be available, or if those stockholders might be willing to purchase such convertible stock," Highland Capital said in the Oct. 23 letter from Kevin Ciavarra, an officer of the firm’s general partner and general counsel to the special committee of Loral’s board that approved the MHR deal. "Loral allowed MHR to use its insider status to enrich itself at the expense of Loral’s other stockholders."

Highland Capital and its affiliates own more than 5 percent of Loral’s common stock, and their stance is supported by Murray Capital.

"Murray Capital has waited patiently for Loral to deliver on its potential after emerging from bankruptcy in November 2005," Murray said. "Now that we may be on the cusp of a bright future, we find the board entering into a transaction that will effectively snatch a great deal of our upside away from us and deliver it to MHR Fund Management."

Murray also questioned any need to raise the capital. "In discussions with Loral senior management shortly after the announcement, I was informed that there is currently no specific transaction agreed to for which Loral would need $300 million in financing," he said. "If that is the case, we would like to know why the company is selling stock to its board chairman at a depressed price as though he is the only game in town, suggesting a level of distress that doesn’t exist."

Both Highland Capital and Murray Capital questioned the independence of the special board that approved the MHR deal.

In its letter, Murray Capital claimed that six of the eight members of the special board had financial involvements rendering them less than independent in evaluating the MHR deal. Along with Rachesky, the deal was approved by Targoff; Sai Devabhaktuni and Hal Goldstein, both principals at MHR; John Harkey Jr., a director at Leap Wireless where both Rachesky is chairman and the company’s largest shareholder, and Targoff is a director; and Dean Olmstead, a Loral consultant. "I do not question that the non-MHR directors have qualifications suitable for Loral," Murray Capital said. "When taken as a whole, however, the board composition is quite troubling. As you must be aware, it appears that each and every one of your directors has [either] financial relationships with Loral or one another, consulting agreements, or serve on other boards together."

Highland Capital compared the approval of the deal to insider trading: "It is a mystery to us why you have put yourselves in the crosshairs of possible litigation and regulatory action by failing to exercise your fiduciary duties for the good of all stockholders, and by approving this transaction."

Highland Capital made a competing offer to underwrite a $300 million convertible perpetual preferred stock transaction that it claims would be a better deal for Loral stockholders, and open to all of Loral’s public stockholders except MHR and its affiliates. While making its own offer, Highland Capital called for Loral’s board to consider other transactions.

Murray Capital also called for Loral’s board to reject or revise the MHR transaction and explore alternatives, including the Highland Capital proposal. "As a board it is your responsibility to insist that Loral conduct its affairs in a manner consistent with that of a public company."

–Jason Bates