The December announcement that Loral Space and Communications and a Canadian public pension fund will purchase Telesat Canada from Bell Canada Enterprises should not have surprised industry observers.
In December, we looked at the possibilities for further consolidation across the satellite operator, manufacturer and launch service provider sectors in 2007. One possibility we outlined was a second wave of regional consolidation in the Fixed Satellite Services (FSS) sector in the wake of the first wave begun in 2004 with private equity firms’ entry into the sector. That wave culminated in 2006 with Intelsat’s acquisition of PanAmSat and SES Global’s acquisition of New Skies Satellites.
While Intelsat and SES Global are the unquestioned major global FSS operators as well as possible participants in a second wave of consolidation, they have their recent acquisitions to digest, and in the case of Intelsat, a significant debt load to reduce through a public offering or other means before looking at another acquisition.
Another possibility within the FSS sector we looked at was that the restructured Loral might seek to acquire regional operators and become the third leg of an FSS tripod In October, the company announced a $300 million financing from its largest shareholder to fund strategic acquisitions in both satellite services and manufacturing. An obvious target in this strategy was Telesat Canada.
However, recent analyst opinion from Washington to New York to Paris had been that Telesat would go public instead of being acquired, based on the perception that Canadian foreign ownership restrictions would prevent an acquisition by a financial or strategic acquirer.
This opinion ignored the prior success of Telesat Canada affiliate TMI Communications in satisfying the Canadian regulatory framework in creating L-band joint venture Mobile Satellite Ventures LP with Motient Corp. The transaction required the structural separation of non-Canadian majority economic interests from voting interests, for which Canadian majority or supermajority control was required (Full disclosure: This columnist was TMI’s attorney on that transaction).
In October, Loral also announced its intention to spin off the Skynet satellite operations to concentrate on manufacturing, asserting that Skynet’s fleet of four satellites was too small to compete effectively with global FSS players. The overall effect of this move was to dampen industry speculation about a Loral-Telesat business combination.
However, that is just what happened.
The Loral-Telesat Canada deal, valued at about $2.8 billion plus $148 million in assumed Telesat Canada debt, has Loral spinning off its Skynet satellite fleet and related assets into a new Canadian joint venture vehicle to be called Telesat. Loral also will make a cash infusion and assume 64 percent of the equity in the joint venture but hold only one-third of the voting rights. Loral’s combined equity and cash contribution is valued at just less than $1 billion.
The Canadian Public Sector Pension Investments Board is making a cash investment of roughly half of Loral’s combined Skynet equity and cash investment and will receive 36 percent of the joint venture equity but two-thirds of the voting rights in order to satisfy Canadian foreign ownership regulations. In addition to the deal’s valuation of Telesat Canada’s and Loral Skynet’s assets, additional investment from a banking syndicate and a bond investor syndicate gives new Telesat an implied enterprise value of nearly $4.3 billion.
The deal resolves Loral’s wish to spin off its satellite operations to concentrate on manufacturing and Telesat’s parent BCE’s desire to exit the satellite business altogether.
The new Telesat will be the fourth largest satellite operator — behind Intelsat, SES and Eutelsat — with a fleet of 11 satellites and four more due to launch throughout the next three years. Telesat also will be a global operator by footprint.
This transaction, as we said at the beginning, should not have come as a surprise. It is also not a one-off.
It is the first movement in a new wave of regional consolidation to come. Telesat may not be finished growing; probably it should not be finished. And of course, Intelsat — once its debt is retired — and SES Global will look hard at the remaining opportunities now that the regional operators are officially in play and a new rival is looking at them, too.