Loral Space & Communications completed a sale of $300 million of stock to MHR Fund Management LLC, Loral’s largest shareholder, Loral announced Feb. 27.

The deal was announced in October and was delayed after other shareholders raised opposition. Investment firms Murray Capital Management Inc. and Highland Capital Management LP labeled it as a "sweetheart deal" that would allow a "stealth takeover" of Loral. MHR was founded by Mark Rachesky, chairman of Loral’s board.

Following initial opposition from Murray and Highland, Loral said it would seek alternatives to the original transaction that would include the participation of all interested shareholders. Loral announced Feb. 26 that it would proceed with the original plan after being informed by Nasdaq that Loral does not need shareholder approval to proceed with the deal if certain terms are amended. Loral and MHR are preparing modifications to the terms of the transaction that will satisfy Nasdaq requirements, Loral said.

"Nasdaq has also indicated that adjustments or alternatives other than to effect compliance with its rules would effectively require the parties to agree to rescind and renegotiate the transaction, which is not an available alternative," Loral said.

Murray Capital delivered a response to Loral’s board Feb. 27 outlining Murray Capital’s continuing opposition to the securities purchase agreement and its complaint that the proposed transaction is a "sweetheart deal" for MHR and Rachesky; that Loral continues to provide MHR with opportunity to conduct a "stealth take-over" of Loral; and that under the securities purchase agreement, the preferred stock would be convertible into common shares at a price of $30.15. Loral’s common stock closed at $46.55 Feb. 28.

Murray Capital concluded that "the transaction would create a risk-free windfall profit of close to $90 million (pretax) for Mark Rachesky’s private equity firm, at the expense of other shareholders."

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.

Highland Capital and Murray Capital disagreed.

"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 outlined in the Oct. 23 letter 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 was 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."