Fordham University: Long Loral

Loral Space & Communications (NASDAQ:LORL) Long Recommendation
April 9th, 2016
ordham.edu
ersity Gabelli School of Business
at figures in this presentation are in CAD unless affixed with US or otherwise noted
figures are in USD unless otherwise noted
Investment Thesis
Spotting
Spotting the
the End
End Before
Before it
it Begins
Begins
Lorals 50% fall over the past year is unjustified and
provides the opportunity to buy its valuable Telesat holding

at a large discount to intrinsic value with a monetization
event being an immediate trigger to filling the value gap
LORAL SPACE & COMMUNICATIONS LONG RECOMMENDATION
Clues point to an IPO thats making headway behind the
scenes and an upcoming refinancing will help shareholders

realize value in Loral
Financials look to be deteriorating at first glance, but this
Loral Company Data

Price ($)
Date of Price
52-week Range ($)
Market Cap ($M)
Shares Out (M)
Short Interest (% Float)
Recommendation
Price Target ($)
Implied Upside
34.72
7-Apr-16
29.55 - 70.35
1073.82
30.93
28.55
BUY
63.00
81%
Loral Share Price vs. Competitors & CAD
has been mainly caused by fluctuations in Telesats dollar

denominated debt and the Company should finally
experience a currency tailwind in Q1 earnings
Telesats dominant position is relatively protected in an
increasingly competitive environment due to economies of

scale (and increased risks could even increase the chance
of a monetization event)
Source: Top Yahoo Finance, Loral 10-K
Bottom Bloomberg
Contents
Overview
Catalysts
11
Valuation
19
Risks & Mitigants
24
Conclusion
28
Loral Space & Communications Breakdown

Overview
Overview
Holding
Holding Structure
Structure
United States based satellite communications
company which operates by investing in subsidiary

satellite communications companies
Has no substantial operations and $53M in cash

Currently, 40% of outstanding shares are owned
by activist investor Mark Rachesky of MHR

Investments, a protg of Carl Icahn
Telesat is Lorals main remaining holding after
multiple divestitures and most analysis will refer to

Telesat as it accounts for almost all of Lorals value
The Telesat holding was acquired in a joint deal
with the Public Sector Pension Investment Board

(PSP) on October 31st, 2007
56% ownership
62.8% economic interest

32.7% voting interest
Telesat Breakdown
Overview
Overview
The largest Canadian based satellite
telecommunications company (private)

Telesat has 19 satellites in operation with two more
under construction (among additional

experimental projects)
The Company contracts spectrum in a mixture of
C/Ku/Ka/L bands across the globe for a multitude

of different applications in three distinct segments
Source: Telesat website
Revenue
Revenue Breakdown
Breakdown
Satellite
expertise
9% 3%
9%
79%
North
America
Europe
Latin
America
Telesat Monetization Timeline

Summary
Summary
Both PSP and Loral have attempted on multiple occasions to monetize the stake in Telesat although nothing
can happen until both agree on a deal and the Shareholder Agreement is terminated
Now is the first time in years where both parties may come to an agreement on a deal
April 2011
Telesat
considers
takeover offers
from US satellite
operator
Echostar and
Carlyle (seeking
$6B)
October 2007
PSP and Loral
enter into an
agreement to
acquire Telesat
for $3.25B
2010
Telesat reviewed
a possible IPO
proposed by
PSP, rejected a
bid from
Blackstone and
withdrew from a
bidding group
that included
KKR
March 2014
Reuters reported
that Loral hired
Perella Weinberg
to advise on a
potential sale
Fall 2012
PSP exercises its
right to require
Telesat to
conduct an IPO
but is rejected
by Loral on tax
concerns
February 2016
Lorals 10-K
shows that
Telesat has
selected two comanagers to
explore a
potential IPO
and negotiate
with parties
involved
July 2015
Loral exercised
its right to
require Telesat
to conduct an
IPO
January 2015
Talks between
Mark Rachesky
and the Ontario
Teachers
Pension Plan to
acquire Loral for
$2.6B
($85/share) fell
through
August 2015
Loral said in an
SEC filing that
PSP did not wish
to engage in a
combination
transaction
while it did not
comment on the
IPO (while an
underwriter was
signed)
Industry Overview
Landscape
Landscape
The large players; Intelsat, Inmarsat, SES,
Eutelsat and O3b all have high market share,

favorable operating metrics and dominance
Intelsat is the exception as it is currently
undergoing limited defaults

Barriers to entry
Government regulation and costs involved
with launching satellites

Difficulty in obtaining orbital slots (i.e. where
the satellite is located)

High upfront cost of constructing a satellite
Existing customer relationships and startups
cannot meet the needs of large customers
Technology
Technology
High-throughput satellites (HTS)

Provides a multiple of current throughput (up
to 100x+) using spot beams

Increases capacity exponentially (which can
lead to downwards pricing pressure)

HTS has yet to be detrimental to major
international satellite operators

Regional operators have felt the brunt of the
effects as competition grows

Barriers to entry have helped international
operators to maintain share

Advancements in small and low-earth-orbit (LEO)
satellites are constantly taking place
Industry Overview
Growth
Growth Opportunities
Opportunities
Industry demand growth in:

Video services due to the growing number of HD channels
Military satellite communications (as backups)
Cellular backhaul
Transportation
Internet of Things
Corporate networks of the developing world
Telstar 12 VANTAGE was just launched and has 30% more capacity than its predecessor satellite
Telstar 19 VANTAGE will expand coverage in the Americas
Telstar 18 VANTAGE will expand into the Eastern hemisphere
Authorized to operate a global LEO satellite constellation and has plans for two satellites
Telesat Financial Overview

Operating
Operating Strength
Strength
Revenues of $955M and EBITDA of $764M with
gross margins at 81.5%

Sharp devaluation of the Canadian dollar in
relation to the US dollar in 2015 caused reduction

in common equity from ~$815M to ~$600M
However, operating strength has been relatively
unaffected by currency fluctuations as revenue and

EBITDA have both increased
Looking
Looking Back
Back in
in Time
Time
The last time Loral traded near US$35/share in
February 2010, Telesat had:

$170M less in revenue
$230M less operating income
$120M less in cash from operations
$250M less common equity
All metrics are the same or better as when Loral
was offered US$85/share in 2014

Telesat has continued to grow in a stable manner
Satellite launches with additional capacity should
help this trend, even faced with the possibility of

downwards pricing pressure from HTS additions
Telesat Backlog Analysis

Summary
Summary
The chart below shows Telesats revenue backlog as it was announced at the fiscal year end 2011 to 2015
The backlog was $4.8B at the end of 2015, compared to $4.5B at the end of 2014
This years backlog numbers appear to show some of the largest YoY growth so far
*Telesat only needs to realize an additional $218M above its 2016 backlog to beat last years revenue results
Backlo
g as
reporte
d
2011
2012
2013
2014
2015
Actual
Revenu
e
Actual
Revenu
e Over
Backlo
g
201
2
20
13
201
4
201
5
201
6
201
7
201
8
201
9
202
0
Thereaf
ter
Total
605
846
590
667
897
542
598
717
923
476
513
610
701
955
443
510
562
737
461
502
650
458
575
421
526
488
3,234
2,900
2,644
1,896
1,825
5,447
5,121
4,942
4,540
4,801
241
230
206
254
10
Contents
Overview
Catalysts
11
Valuation
19
Risks & Mitigants
24
Conclusion
28
11
Catalyst Summary
What
What Will
Will Get
Get Loral
Loral Moving
Moving in
in the
the Right
Right Direction?
Direction?
Currency tailwinds result in a Q1 earnings beat renewing attention in a stock battered by constant currency
headwinds throughout 2015, which has most likely resulted in unwarranted selling
A necessary refinancing to be completed by year end has the potential to negate future currency effects by
matching future debt in currency matched with revenues

A potential IPO or deal makes its way from the depths of the company filings to the front page of a press
release by next year

Telstar 12 VANTAGEs extra HTS capacity ends up driving revenues higher from Telesat over the next year
Telesat announces additional details on its LEO satellites and the potential for revenue growth
12
Currency Headwinds Turn to Tailwinds

Summary
Summary
Over the past year, the CAD/USD is almost flat due to a rebound
in the first few months (it was down ~12% at worst) while Loral
has fallen an astounding 46%
The majority of Telesats debt is denominated in USD while the
Company is operated out of Canada, making it harder for the

Company to pay back its US debt with devalued Canadian
dollars (accounting for this resulted in a $266M loss in 2015 due
to a $540M forex expense)
Although common equity has fallen ~$200M, operations remain
the same as they were before and the devaluation has actually
served to boost revenues and EBITDA due to 51% of revenues
being received in USD (which has acted as a partial hedge)
Canadian Dollar Strength in 2016

1.50
1.45
1.40
1.35
1.30
1.25
The USD/CAD has rebounded from 1.38 at year end 2015 to
1.30 today which will result in a currency tailwind for Telesat that
could attract investors
Source: CapitalIQ
13
Upcoming Debt Maturity Management

Summary
Summary
About $375M from its CLTA and US$900M of US Senior Notes (which is ~$1.6B) come due in February 2017
The speculative grade debt market appears to have stabilized
AMC Networks raised US$1B after upsizing an offering
Intelsat (a Telesat competitor) raised US$1.25B after upsizing from US$1B while the Company is
currently undergoing limited defaults

Telesat has $690M in cash if needed to pay off a portion of the debt and its a much more attractive option in
the speculative grade debt market given its stable business and $4.8B backlog
If Intelsat was able to borrow US$1.25B, Telesat should have absolutely no issues
Moodys believes Telesat will be able to refinance and maintained almost all of its ratings on its debt
Loan
Revolver
CAD Term Loan A
US Senior Notes
US Term Loan B
CAD Term Loan B
Type
Secured
Secured
Unsecured
Secured
Secured
Outstanding
$0 million
$375 million
US$900 million
US$1,698 million
$136 million
Maturity
March 2017
March 2017
May 2017
March 2019*
March 2019
*springing immediate maturity on February 13, 2017 if Senior Notes are not refinanced or
repaid
14
Renewed Analyst Interest and an IPO

Summary
Summary
Bulge bracket analysts are researching Loral again after over a year
Credit Suisse showed up on the Q3 2015 earnings call and again on the Q4 2015 earnings call
accompanied by an analyst from JPMorgan these are two banks who had been signed to the
attempted Telesat IPO in 2012
No bank has released research on the Company since 2013 and the pledge of bank resources raises
some eyebrows as the diligence doesnt appear to be for the research division
Comparing the 10-Q to the 10-K reveals potential IPO advancements
Telesat has selected two co-managing underwriters
Lead underwriter changed to lead underwriters
Now references a cash distribution absent in the 10-Q
An IPO could be blocked by major holders but PSP has not commented on the IPO proposed by Telesat and
only indicated that it did not want to follow through with a combination transaction
15
Working on a Shrinking Time Horizon

Summary
Summary
The two big players are MHR Investments (40% holder of Loral) and PSP (38% holder of Telesat)
PSP noted in its 2014 report that it typically holds private equity investments for five to ten years
The ninth anniversary of the deal is October 31, 2016
PSP could be running up on a theoretical divestment deadline

In its 2015 report, it did mention that Telesat, a leading global satellite operator, which again reported
EBITDA growth and strong cash flow generation, led our Canadian investments.
Could view this as an opportune time to exit the investment
It is focused on long-term investments, usually held between 5

to 10 years
PSP Investments 2015 Annual Report statement on its Private Equity portfolio
16
Demand for a Telesat IPO

Summary
Summary
Estimating IPO demand is not easy as major players in the industry are spread all over the world
Only one equity capital markets (ECM) transaction in satellite telecommunications for 2016 and three in 2015
A French fund purchased 7% of Eutelsat for US$525M two weeks ago
KDDI Corp was able to fully exit its position in LSE-traded Inmarsat in February 2015, selling US$281M
worth of shares in a follow-on without issue

Largest deal before this was Abertis Infraestructuras exiting its 5% position in Eutelsat by selling
US$375M worth of shares

Intelsats US IPO was a disaster (many try to compare a potential Telesat IPO to this)
Originally announced US$1.5B IPO and ended up raising less than $400M
Intelsat was a highly levered company with US$16B in debt and US$9-10B backlog
Telesats debt load of less than US$4B is easily covered by its $4.8B backlog
A Telesat IPO between US$400M and US$1B could be a real possibility
17
Even Telesat Wants Shares

Summary
Summary
Telesat is purchasing 25% of its outstanding stock options for $25M

Last time the Company did this was in 2012 (for vested options) after a deal fell through the stock
price gained over 50% within the next year
Little reason to do this unless Telesat expects its value to increase and wants to avoid dilution (possibly
in the event of a deal/IPO)

Mark Rachesky increased his position in Loral for the first time since 2009, increasing his stake to 40%
Most large funds increased positions in Loral, with Leon Cooperman buying over another 400,000 shares
Average volume for Loral is over 80K this year compared with 55K last year
Loral shares are tightly held by hedge funds and insiders, leaving an estimated float of only 2.7M shares
which would mean almost 28.55% of the outstanding float is sold short
Short sellers most likely feel comfortable with this due to the lack of news flow and attention post-deal
The potential for a short squeeze is major assuming significant news is announced
18
Contents
Overview
Catalysts
11
Valuation
19
Risks & Mitigants
24
Conclusion
28
19
Comparable Valuation
Establishing
Establishing Comparables
Comparables
Used the largest competitors in the industry which are very close comparables for Telesat
Inmarsat on the London Stock Exchange, Intelsat on the NYSE, SES trade on both the Luxembourg Stock
Exchange and Euronext Paris and then Eutelsat on the Euronext Paris
All have incredibly similar operating metrics to Telesat (although Intelsat is having major debt issues)
Telesat could easily place in the upper half of comparable metrics
Source: CapitalIQ
20
Comparable
Valuation
On a multiples basis (under the assumption that a deal happens soon), there is almost no downside
indicating the market does not believe a deal will happen for quite some time
Weighted value towards EV/EBITDA as it is more commonly used in this capital expenditure heavy industry
Valued Telesat in USD first and used Lorals 62.8% economic interest to determine a value of for the holding
Telesat would most likely fall above the mean/median due to its superior metrics
21
DCF Valuation
Base
Base Case
Case
Very conservative base case which assumes low impact from pricing pressure and slight revenue declines
(<1% average) over the next 5 years

Margins are maintained at current levels and CapEx comes in line with assumptions
Canadian dollar stays steady at an exchange rate of 1.3

Used a WACC of 8% and a terminal EBITDA multiple of 10.4x (in line with comparables)
USDCAD Exchange Rate

$63.2
9
1.1
1.2
1.3
1.4
1.5
9.0%
78.99
68.02
58.74
50.78
43.89
8.5%
81.64
70.45
60.98
52.87
45.83
8.0%
84.37
72.95
63.29
55.01
47.83
22
7.5%
87.17
75.52
65.66
57.21
49.89
DCF Valuation
Bear
Bear Case
Case
Bull
Bull Case
Case
Canadian currency continues to strengthen to an
exchange rate of 1.1CAD:1USD before refinancing

Loral refinances its debt within the next year under
favorable terms and matches the currency

denominations to its current revenue
Telesat is able to utilize its extra capacity from
Telstar 12, 18 and 19 VANTAGE and launches its

LEO satellites which results in increasing revenue
(2% growth per year)
Pricing pressure increases significantly due to
additional HTS capacity and causes revenue to fall

at a pace quicker than expected (-4% each year
for the next five years) in addition to cost overruns
in capital expenditures and tightening margins
Canadian dollar continues its devaluation and falls
to an exchange rate of 1.5CAD:1USD

Downside of 28%
Upside of over 200% is a 7:1 risk/reward ratio
WACC
$78.93
9.0%
8.5%
8.0%
7.5%
7.0%
1.1
96.71
99.74
102.85
106.04
109.33
1.2
84.26
87.04
89.89
92.82
95.83
1.3
73.73
76.30
78.93
81.63
84.41
1.4
64.71
67.09
69.53
72.04
74.62
1.5
56.88
59.10
61.38
63.73
66.13
WACC
$40.5
6
9.0%
8.5%
8.0%
7.5%
7.0%
1.1
53.23
55.34
57.51
59.73
62.02
1.2
44.41
46.34
48.33
50.37
52.46
1.3
36.94
38.73
40.56
42.44
44.38
1.4
30.54
32.20
33.90
35.65
37.44
1.5
25.00
26.54
28.13
29.76
31.44
23
Contents
Overview
Catalysts
11
Valuation
19
Risks & Mitigants
24
Conclusion
28
24
Risk: Failure to Reach a Monetization Deal

Mitigants
Mitigants
Monetization is not necessary to realize above market returns over the next few years as Telesat grows
Other positive catalysts mentioned before could also move the stock higher without the need for a deal
Returns only increase the sooner a deal is reached and a deal being reached in three to five years would still
provide alpha, even with some deterioration in the business

Material risks with the business could pull Loral and PSP to the deal table as theyre both looking out for their
own monetary interest and both want to make the most out of their investment
25
Risk: Competition Within the Satellite Industry Creates

Downwards Pricing Pressure
Mitigants
Mitigants
Telesat usually contracts much of the satellites capacity prior to signing for the construction of given satellite
Company is aware of pricing pressure and will only look to regions where a respectable IRR can be achieved
Protected from much of the price competition at the regional level due to high economies of scale necessary
for the operations of larger customers

Telstar 18 VANTAGE and Telstar 19 VANTAGE along with possible LEO satellites should provide extra
revenue that should mitigate downwards pressure with Telesats own additional contracted capacity
If significant downwards pricing pressure becomes expected, the bankers involved with Telesat, Loral and
PSP could pressure the parties to come to a deal which would allow Loral to monetize its stake
26
Risk: Continued CAD Devaluation Resulting in Higher Dollar

Denominated Debt
Mitigants
Mitigants
The exchange rate has so far rebounded this year from 1.38 to 1.30 leaving ample room for some additional
devaluation without a negative effect on Telesats balance sheet

Telesat has multiple opportunities arising to negate these effects with its upcoming 2017 debt maturities
Telesat has the ability to pay down a portion of its $1.6B due in 2017 with its $690M cash on hand
It could also refinance its 2017 maturities for a more favorable capital structure that would be less
affected by currency effects (which would include having closer to 51% USD denominated debt and the
rest in CAD denominated debt)
27
Contents
Overview
Catalysts
11
Valuation
19
Risks & Mitigants
24
Conclusion
28
28
Conclusion
Summary
Summary
Asymmetric opportunity with a 7:1 risk/reward ratio on a potential 200% upside vs. 28% downside
Loral is over-shorted and underfollowed following a failed deal early in 2015
Currency devaluation will play less of a negative role for Telesat in 2016 and an early year rally could end up
being a tailwind for the Q1 2016 earnings report (with room for further devaluation this year)
The markets and speculative grade credit markets have reopened and Telesat will have the opportunity to
refinance its maturities due in 2017 by demonstrating its solid business and reliable backlog
Large holders, including Mark Rachesky (Vice Chairman and 40% owner of Loral), have increased stakes
All of this paves the way for a potentially successful IPO or other monetization event and clues in the wording
of the 10-K, increased analyst interest, a shrinking time horizon and a buyback of Telesat options indicate an
IPO could be on its way
With or without monetization, Telesat is still a strong business trading a large discount to intrinsic value with a
large competitive moat to defend its position in the industry against any major pricing pressure in the
meantime
29
Conclusion
Q&A
Q&A
Its only a matter of time before Loral/MHR and PSP

decide they need out, and now is the time to buy in.
Recommendation
Price ($)
Date of Price
Recommendation
Price Target ($)
Implied Upside
34.72
7-Apr-16
BUY
63.00
81%
Q&
A
30

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Loral Space & Communications (NASDAQ:LORL) Long Recommendation

April 9th, 2016

Lorals 50% fall over the past year is unjustified and

provides the opportunity to buy its valuable Telesat holding

Clues point to an IPO thats making headway behind the

scenes and an upcoming refinancing will help shareholders

Loral Company Data

Loral Share Price vs. Competitors & CAD

has been mainly caused by fluctuations in Telesats dollar

increasingly competitive environment due to economies of

LORAL SPACE & COMMUNICATIONS LONG RECOMMENDATION

Risks & Mitigants

Loral Space & Communications Breakdown

United States based satellite communications

company which operates by investing in subsidiary

LORAL SPACE & COMMUNICATIONS LONG RECOMMENDATION

Has no substantial operations and $53M in cash

by activist investor Mark Rachesky of MHR

multiple divestitures and most analysis will refer to

with the Public Sector Pension Investment Board

62.8% economic interest

The largest Canadian based satellite

telecommunications company (private)

LORAL SPACE & COMMUNICATIONS LONG RECOMMENDATION

under construction (among additional

C/Ku/Ka/L bands across the globe for a multitude

Telesat Monetization Timeline

LORAL SPACE & COMMUNICATIONS LONG RECOMMENDATION

The large players; Intelsat, Inmarsat, SES,

Eutelsat and O3b all have high market share,

undergoing limited defaults

with launching satellites

the satellite is located)

cannot meet the needs of large customers

High-throughput satellites (HTS)

to 100x+) using spot beams

lead to downwards pricing pressure)

international satellite operators

effects as competition grows

operators to maintain share

satellites are constantly taking place

Industry demand growth in:

Telesat Financial Overview

Revenues of $955M and EBITDA of $764M with

gross margins at 81.5%

LORAL SPACE & COMMUNICATIONS LONG RECOMMENDATION

relation to the US dollar in 2015 caused reduction

unaffected by currency fluctuations as revenue and

The last time Loral traded near US$35/share in

February 2010, Telesat had:

All metrics are the same or better as when Loral

was offered US$85/share in 2014

help this trend, even faced with the possibility of

Telesat Backlog Analysis

LORAL SPACE & COMMUNICATIONS LONG RECOMMENDATION

Risks & Mitigants

LORAL SPACE & COMMUNICATIONS LONG RECOMMENDATION

matching future debt in currency matched with revenues

release by next year

Currency Headwinds Turn to Tailwinds

LORAL SPACE & COMMUNICATIONS LONG RECOMMENDATION

The majority of Telesats debt is denominated in USD while the

Company is operated out of Canada, making it harder for the

Canadian Dollar Strength in 2016