EchoStar Keeps Mystery Alive About Loral Plans
The intention of Littleton, Colo.-based EchoStar Communications [Nasdaq: DISH] in offering to buy the assets of New York-based Loral Space & Communication [OTC BB: LRLSQ.OB] is as inscrutable as EchoStar Chairman and CEO Charlie Ergen.
EchoStar’s conditional $1.85 billion offer for all of Loral’s assets was rejected by Loral’s board of directors last week. As a result, Loral’s planned sale of its six North American satellites and orbital slots to Intelsat for roughly $1 billion remains intact but still must go through a bankruptcy court auction.
The bankruptcy court turned down an earlier EchoStar request to delay the auction process to allow time for it to conduct due diligence, as well as a related motion to open up bidding for all of Loral’s assets instead of just those that serve North America.
The main problem is that EchoStar’s proposal is inadequate by “a large margin,” said Bernard Schwartz, Loral’s chairman and CEO, during an interview with SATELLITE NEWS.
When queried about whether Ergen or an intermediary had contacted him directly to ask what would be required to buy all or a portion of Loral’s assets, Schwartz said no such conversations had occurred.
That lack of direct contact between the top executives of each company lends support to the view that EchoStar’s real intention is to delay Intelsat’s purchase of Loral’s North American assets rather than to actually buy Loral. The most important unanswered question is why EchoStar would want to acquire Loral’s low margin satellite manufacturing unit, Space Systems/Loral.
EchoStar’s $1.85 billion bid is especially low in light of the significant increase in Loral’s value that has been achieved since the company entered Chapter 11-bankruptcy court protection in July. In contrast to Intelsat’s firm contract, EchoStar’s letter suggested it might at best up the offer by $750 million to $850 million for Loral’s assets, including joint venture holdings.
“We doubt that creditors would chase the speculative possibility of a deal with EchoStar instead of taking the ‘bird in the hand’ they have with Intelsat,” said Tom Watts, a satellite analyst with SG Cowen. EchoStar still has the option to make an unconditional bid to buy Loral’s North American satellite assets by an Oct. 15 bankruptcy-court deadline, he added.
“A non-binding, conditional offer is like having your cake and eating it too,” said William Coulter, a partner with the Coudert Brothers law firm. EchoStar can gain bankruptcy court consideration for its proposal, without raising the price, since the judge is obligated to take into account the interests of Loral’s unsecured creditors, not just the secured creditors who would benefit from the asset sale to Intelsat, he noted.
“We have not decided whether to participate in the bankruptcy court proceeding as it currently stands,” said Steve Caulk, an EchoStar spokesman.
Ironically, Loral recently announced that EchoStar’s satellite TV nemesis, DirecTV, ordered two satellites from Space Systems/Loral. DirecTV has the option to withdraw from the contract if the satellite manufacturer is sold.
Schwartz expressed confidence that the Loral assets Intelsat would not buy should increase further in value. He pointed to recent contracts that Loral obtained to build new satellites for DirecTV and Intelsat as evidence that Loral remains a “trusted and valued business partner” that is capable of providing the industry’s most advanced and reliable satellites and satellite services.
The best course of action for Loral is to proceed with the proposed sale of its North American assets, enhance the value of its other assets, and emerge from the bankruptcy process with a viable satellite service and manufacturing business, Schwartz said.
Under the bidding procedures approved by the bankruptcy court, Loral will evaluate any and all bids that it receives for its North American satellites on or before Oct. 15.
The latest proposal from EchoStar is little different from its non-binding expression of interest last month, Dianne VanBeber, Intelsat’s vice president of investor relations.
“It is not an offer,” VanBeber said. “Intelsat has a fully negotiated definitive agreement. It is not subject to due diligence. It is not subject to unnamed conditions. As Loral points out, all EchoStar did was make an indication of interest.”
EchoStar’s proposal is an attempted “end-run” around a competitive process that already has been approved by the bankruptcy court, VanBeber said. The overture appears aimed at trying to disrupt an auction schedule that has been in place since August, she added.
“The only process that is underway right now is the sale of the North American satellites,” VanBeber said. “For those assets, Intelsat’s bid was affirmed by the bankruptcy court as the ‘stalking horse’ bid. It is the bid to beat.”
From the standpoint of Loral creditors and other stakeholders, Intelsat should be an appealing buyer that has “a great track record for fulfilling its contracts” VanBeber said. In contrast, “EchoStar’s indication of interest is clouded with uncertainty. What EchoStar is indicating interest in is simply not for sale under the current process,” she said. –Paul Dykewicz
(Jeanette Clonan, Loral Space, 212/338-5658; Tom Watts, SG Cowen, 212/278-4260; William Coulter, Coudert Brothers, 202/775 5100; Dianne VanBeber, Intelsat, 202/944-7406)