Loral’s Assets Rise In Value

Bankruptcy court proceedings seldom involve as much intrigue as those of Loral Space and Communications.

The big winner so far seems to be Loral Chairman and CEO Bernard Schwartz, whose claims that the company has valuable assets has been validated by an overture from EchoStar Communications [Nasdaq: DISH] to buy satellites being built by Space Systems/Loral for rival DirecTV. EchoStar had previously tried to outbid Intelsat in acquiring Loral’s assets.

If the bankruptcy court judge accepts DirecTV’s new satellite orders, Loral would have hundreds of millions of dollars of new manufacturing contracts signed after it entered Chapter 11.

In an environment when orders are scarce, Loral has been fortunate to pick up contracts while working through its bankruptcy process. EchoStar, thwarted thus far in its efforts to buy Loral in its entirety, has been driving up the value of Loral’s assets with its offers.

The latest example occurred last Wednesday when EchoStar placed a competing $1.029 billion bid with Loral for its North American satellite assets that Intelsat previously had agreed to purchase for roughly $1 billion. If Loral’s board of directors finds that the EchoStar offer tops Intelsat’s proposal, the bankruptcy court would let them compete in an auction starting today.

Loral’s creditors could gain from EchoStar’s involvement in the bankruptcy case. They will benefit from sweetened contract terms offered by DirecTV, as well as new satellite orders placed by its sister company, PanAmSat [Nasdaq: SPOT]. The new orders were submitted to the bankruptcy court on Oct. 10.

The bankruptcy proceedings have been lively, primarily due to the never-ending competitive zeal of EchoStar Chairman and CEO Charlie Ergen. His unexpected offer to buy the nearly completed DirecTV 7S satellite off the factory floor prompted DirecTV parent Hughes Electronics [NYSE: GMH] to firm up new satellite orders for its business units to keep DirecTV 7S out of the hands of EchoStar.

Hughes’ offer includes a commitment to buy two additional satellites, the DirecTV 8 and DirecTV 9S, from Space Systems/Loral. By firming up two previously non-binding satellite orders and having its PanAmSat subsidiary order a new satellite and take an option on another, Hughes wants to make sure it is making an offer Loral and the court “cannot refuse.”

The bankruptcy court judge in charge of the Loral proceedings adjourned the Oct. 10 hearing on the DirecTV contracts until Oct. 21 to evaluate the value of the competing offers.

Ergen, EchoStar’s poker-loving leader, ended up forcing Hughes to play the best cards held by DirecTV and PanAmSat, but then watched them raise the stakes by ordering more satellites than EchoStar is likely to need. With no other satellite operating units in the EchoStar fold, Ergen may not be able to match the Hughes proposal satellite-for- satellite but he could counter by having cash on hand for Loral and its creditors. The bankruptcy court judge then would need to determine if Loral and its creditors are best served by the additional satellite orders from Hughes or a superior cash offer.

Hughes tried to head off that possibility by agreeing to pay Loral a $25 million advance for each spacecraft ordered. The total value of the DirecTV 8 and DirecTV 9S orders is $250 million, said Jeff Torkelson, DirecTV’s senior vice president of communications.

The new C-/Ku-band hybrid satellite – to be called PAS 4RR — ordered by PanAmSat from Loral is valued at $105 million. PanAmSat has an option to buy an additional satellite whose configuration has yet to be determined, Torkelson said.

“Loral strongly supports our position, along with its secured creditor group,” Torkelson said. “We expect all of our existing contracts and our new contracts to be approved by the court.”

The unsecured creditors have been urging the bankruptcy court to consider EchoStar’s proposals and any other offers that may be presented. In court filings, the Official Committee of Unsecured Creditors confirmed that it has engaged in “numerous discussions” with EchoStar officials to assess the legitimacy of the company’s interest in acquiring Loral assets and to encourage its participation in the sales process.

The committee filed a request Oct. 9 asking the bankruptcy court judge to review the DirecTV contracts in light of the unsecured creditors’ interests.

Meanwhile, the DirecTV 7S spacecraft being built by Space Systems/Loral is expected to be delivered by year’s end. The DirecTV 7S will enable DirecTV to provide local signals to 41 additional U.S. television markets. Once that satellite is in commercial operation, DirecTV would be able to offer local signals to 85 percent of U.S. television households.

EchoStar’s offer to buy DirecTV 7S would give Loral $100 million in cash. However, DirecTV already had paid more than $100 million to Loral for that satellite, according to Torkelson. The question becomes whether the bankruptcy court judge would consider that prior payment in his decision or simply allow the spacecraft to be sold to the highest bidder without regard for any claim DirecTV might make on that asset as a creditor in the Loral bankruptcy proceeding.

If EchoStar’s proposal is accepted and DirecTV’s contract is not fulfilled, “very substantial claims” would be made upon both Loral and EchoStar, Torkelson said.

In addition, EchoStar would need to pay additional money to reconfigure all three satellites to fit its platform.

Steve Caulk, an EchoStar spokesman, said that bankruptcy laws and procedures permit the debtor to sell satellites that are in the factory at the time of the bankruptcy filing to the highest bidder. On that basis, EchoStar has as much right to buy the DirecTV 7S satellite as any other company.

EchoStar’s offer would provide creditors with $100 million more than DirecTV’s initial offer, Caulk said. “DirecTV increased its offer as a result, but we remain convinced that the DirecTV proposal fails to maximize value for creditors,” Caulk added.

“This skirmish is but one of many, many battles the industry can expect to see in the war of DirecTV vs. EchoStar, especially early next year when News Corp. [NYSE: NWS] takes over Hughes and its divisions,” said Jimmy Schaeffler, head of The Carmel Group consulting firm. — Paul Dykewicz

(Jeff Torkelson, DirecTV, 310/964-5062; Steve Caulk, EchoStar, 303/723-2010; Jimmy Schaeffler, Carmel Group, 831-643-2222)