that it is committed to spinning off its Space Systems/Loral (SS/L) segment. SS/L designs, manufactures and integrates satellites and space systems for a wide variety of commercial and government customers. The unit appears to be growing rather nicely over the past few years. Loral will retain its ownership in satellite communication service provider Telestat and some other miscellaneous stakes including its 54% holding in XTAR.
The company spent most of its Q3 conference call discussing the spin and according to CEO Michael Targoff, it is “targeting to effectuate the spinoff early next year” although he personally thinks the spin will take place “in the first quarter or second quarter.” He also noted that “there are absolutely no other business reasons” that the company wouldn’t move forward with the spin and that “management and employees of Space Systems/Loral are excited about the prospects of functioning as an independent company.”
Sounds like a done deal, no? Unfortunately, while there may be no “business reasons”, there is still one significant roadblock in the way – MHR Fund Management’s equity stake and how to deal with it. As a result of some earlier difficulties at the company, MHR Fund Management, a private investment firm, currently owns close to 60% of LORL’s shares. Not all of those shares have voting rights though, but if the company were to execute a spinoff that might have to change. Apparently, Delaware court law has some things to say about this issue and requires certain things including the formation of an independent committee to work it out. Perhaps the CEO can do a better job explaining the situation:
A condition of the spin is a resolution of the terms of the stock to be distributed to MHR with respect to their nonvoting shares. To that end, the Board of Directors has formed an independent committee to negotiate this with MHR…we have a new charter that was — the result of that loss of years back, that provides on its face that in a distribution of SS/L stock — it doesn’t say it in these words but I’m paraphrasing for you — all the shareholders would receive the same thing. The implication of that would be that if we simply distributed voting stock to all the shareholders, MHR will get voting stock as well, which would take their voting stock to 60%. Needless to say, Delaware law has a lot to say about these subjects. And I’ve had discussions with MHR and they’re willing to work something out short of that. And under Delaware law — that we all learned all too well, and unfortunately, in some respects — you need to have a committee to — an independent committee to negotiate hopefully a resolution of that or an alternative. And so that’s what we’re doing and it’s in process.
and in case that wasn’t clear, here is some more:
It’s an issue for the company. Delaware law, for a long time, has imposed on a Board a host of obligations in connection with what they define as a “maintaining of control by a shareholder” and especially a shareholder already has a large position. And I’m not going to give a recital, I could, and maybe partly I’d be happy to do it, a recital of how I understand that and what the implications of that are and how it affects corporate America. Those of you who read the Delaware law decisions from time to time realize that some of the decisions impose obligations and constraints that some of us would think are overboard and unnecessary. But they do. And so that’s the issue.
Well…maybe he couldn’t do a better job so perhaps one of our readers can. I think a safe takeaway is that if the shareholder issue is resolved, the SS/L spin should be a go during the first half of the year. It has been a few months without any reported progress, but I would expect a deal to get done. That would mean the Form 10 and additional documentation should be released in the near future at which point the analysis can really begin. Why wait though? Why not just ask someone else, maybe say the CEO, to do the work for you? That seems to have been the approach taken by Merrill Lynch’s Jeffrey Smith during the call. In this unusual exchange, Mr Smith actually asked, “would you [Mr. Targoff] consider talking about what you see the value in the different parts after the spin?”
Mr. Targoff’s response:
Wow. Typically, people think that sometimes when you spin a company off, the values of both components are highlighted and the total trading values would be greater than the combined value. I certainly think there’s good reason to think that could happen here as well. You can look at SS/L — and we have our reported numbers and I talked about what they’d be for the quarter and assuming they are in that range — you can look at the EBITDA run rate and, even with a somewhat softer margin next year, get to a value that all of you can calculate, and I don’t necessarily think it’s appropriate for me to do that arithmetic. But that’s one piece. And then you have Telesat, a run rate in excess of $600 million of EBITDA, with the new satellites taking it up to wherever you want to project it, and you can look at the comparables in terms of SES and Eutelsat and draw a conclusion. And I think at the end of the day, if you do that analysis, you would probably agree that this spinoff will probably trade in higher than the combined is today. But I’m not going to be any more specific.
Wow indeed (I know, I know, I am just being harsh). Well…can’t blame him for trying. We will keep you updated.
A special thanks goes out to an alert reader for pointing out we missed this one.
Disclosure: Author holds no position in any stock mentioned.
