Thursday, April 10, 2014

Ontario Teachers To Acquire Telesat from PSP?

Alex Sherman of Bloomberg reports, Ontario Teachers’ Said in Lead for $7 Billion Telesat Deal:
Ontario Teachers' Pension Plan is the front-runner to acquire Loral (LORL) Space & Communications Inc.’s Telesat Holdings Inc. for about $7 billion including debt, people with knowledge of the matter said.

The Telesat purchase would come in two pieces: buying publicly traded Loral, which owns 63 percent of the company, and acquiring the rest from Canada’s Public Sector Pension Investment Board, which co-owns the satellite operator.

Loral could be bought for more than $80 a share, said the people, who asked not to be identified because the talks are private. The shares closed at $70.08 yesterday in New York, giving it a market value of about $2.2 billion. Loral rose 7 percent to $75 at 8:26 a.m. in New York today.

Canada Pension Plan Investment Board also has been in talks with both of Telesat’s owners, the people said. Public Sector Pension owns about 37 percent of Telesat and controls about 67 percent of the voting rights. As a result, both Loral and PSP must agree to a deal for a full sale of Telesat.

The discussions signal that Loral’s largest shareholder, Mark Rachesky’s MHR Fund Management, and PSP are working together to get a deal completed. The two co-owners of Telesat were previously not talking with each other, making a joint transaction tricky, according to the people. Rachesky is Loral’s chairman.

A sale could be announced later this month or in early May, the people said.

Michael Bolitho, a Telesat spokesman, declined to comment, as did Deborah Allan, a spokeswoman for Ontario Teachers’ Pension Plan. A representative for PSP didn’t respond to requests for comment, while Linda Sims, a spokeswoman for Canada Pension Plan, declined to comment.
Previous Interest

Buyout firms including Apax Partners LLP, KKR & Co. and Carlyle Group LP had looked at buying Telesat, and all have dropped out of the bidding, the people familiar with the situation said. Reuters previously reported that Loral was in talks with Ontario Teachers’ and Canada Pension Plan.

Loral and PSP acquired Telesat from Canadian telecommunications company BCE Inc., a deal announced in December 2006 valued at about $3 billion including debt.

Telesat owns 14 satellites and manages the operations of satellites for third parties, according to its website. The company was founded in 1969 and launched the world’s first commercial, domestic communications satellite in geostationary orbit in 1972.
A few thoughts came to me as I read this article. First, if it goes through, PSP is making off like a bandit on this deal. I must admit, when Derek Murphy, Jim Pittman and PSP first announced the acquisition of Telesat back in December 2006, I thought they paid way too much and that this deal was going to be a major flop (for a while, it sure looked that way).

But I was obviously wrong. In the pension world, if you hold on to an asset long enough, there is always a greater fool willing to bid up the price of that asset, and in this case, it's Ontario Teachers. Now, the people running Teachers' private equity are no fools, but I have to wonder why are they paying $7 billion to acquire Telesat from Loral Space & Communications and PSP when other bigger and smarter buyout funds dropped out of the bidding process?

Part of the reason might be because this asset falls more into the infrastructure spectrum, so you need a longer investment horizon to unlock its true potential. One PE expert told me if Ontario Teachers' "keeps the leverage level low (which may not be possible to be a competitive bidder) as this business is punctuated by large capex requirements, it would be a decent long term hold, and probably re-listed for long term capital access needs like most of the industry."

This expert added the following on the deal:
PSP took a huge risk at the time, so them doing well is ok. Could have invested in some distressed public companies in the sector at the time and also done very well, so not sure what the risk adjusted outcome against liquid options would have looked like, they still probably did well on this measure due to the Loral synergies. BC Partners and Apax in Europe also did very well in this sector, so it has been hot for years. PE in its classical form was really about clever distress investing, and financially de-risking as quickly as possible. One lesson people seem to forget is everything is cyclical. Understanding the drivers of an industries cyclicality is what winning investors do. 
Great insights from someone who understands the nature of the beast. And he's right, the entire sector has been hot for years and on a risk-adjusted basis, PSP might have done better investing in liquid public companies rather than an illiquid private asset.

It's also worth noting that Ontario Teachers' is still a large BCE shareholder, and Claude Lamoureux, OTPP's former president and CEO and the man who hired Ron Mock at Teachers after Phoenix blew up, sits on BCE's Board, so maybe this company has some operational relevance to BCE that gives OTPP a diligence edge.

In any case, it's funny how Ron Mock was recently talking up illiquidity risk and "increased competition" among Canadian pension plans when he's fully entrenched as part of the great Canadian pension club (they all know each other and talk to each other).

Lastly, it's worth noting Warren Buffett’s Berkshire Hathaway recently cashed out its investment in Dish Network Corp. (DISH), selling its small stake in the satellite broadcaster while buying a number of shares in Liberty Global Plc, John Malone’s European cable TV giant. Hence, PSP's timing to unload Telesat at a nice premium is superb. 

Below, Bloomberg’s Alex Sherman reports on a possible merger between Dish and DirecTV. He speaks with Emily Chang on Bloomberg Television’s “Bloomberg West.”