June 28 (Bloomberg) -- MacDonald, Dettwiler & Associates Ltd. will gain a beachhead in the U.S. with the $875 million purchase of Loral Space & Communications Inc.’s commercial satellite unit as the company that made NASA’s space arm cuts reliance on government spending.
About two-thirds of a projected C$1.9 billion ($1.9 billion) in revenue will come from commercial communications after the transaction, compared with one-third now, Chief Financial Officer Anil Wirasekara told analysts on a conference call yesterday. The Richmond, British Columbia-based company’s sales will double and the U.S. will replace Canada as its biggest market.
“It will launch them in a leadership position in their commercial communications satellite market, and provide them with a U.S. platform that they have been looking for,” Tim Caulfield, co-lead manager of the C$1.7 billion Bissett Canadian Equity Fund, said in a telephone interview from Calgary.
MacDonald Dettwiler had been looking to gain a springboard in the U.S. since completing the C$850 million sale in January 2011 of its property information business to TPG Capital.
Investors welcomed the satellite transaction, which will be financed with a mixture of cash and debt. MacDonald Dettwiler stock jumped 28 percent to C$57.21 yesterday -- its biggest gain since its initial public offering in July 2000. The shares, which had dropped 5.2 percent this year through June 26, fell 0.4 percent to C$57.05 by 4 p.m. today.
Bissett and parent Franklin Templeton Investments together own about 2.6 percent of MacDonald Dettwiler’s outstanding stock, according to data compiled by Bloomberg. That makes Franklin Templeton the fourth-largest shareholder in MacDonald Dettwiler, the data show. Ontario Teachers’ Pension Plan is the biggest holder with 14 percent of the stock.
MacDonald Dettwiler is expanding into space systems four years after the Canadian government blocked the company’s attempt to sell its satellite division to Alliant Techsystems Inc., now based in Arlington, Virginia.
The proposed sale to Alliant was particularly controversial because of MacDonald Dettwiler’s Canadarm and its exclusive distribution rights to Canada’s Radarsat earth observation satellites. The robotic arm, adorned with a Canadian flag in space and featured in school textbooks, was first used on space shuttles in 1981. The rejection was the first time the country had blocked a foreign takeover since at least 1985.
Acquiring Loral’s satellite operations will add about $2 billion of future work to MacDonald Dettwiler’s backlog, according to a statement. As of March 31, the Canadian company had C$765 million in its order book.
“We’re realizing our long-term objective of gaining a stronger presence in the U.S. market and significantly increasing our focus on the commercial market,” Chief Executive Officer Daniel Friedmann said on the call.
Loral’s satellite unit is driven by the global demand for television, digital audio, broadband Internet, mobile communications, and voice telephony, Friedman said in the statement.
The deal is subject to regulatory clearance and will probably close later this year, MacDonald Dettwiler said.
The Loral unit, which employs about 3,200 people and owns manufacturing facilities in Palo Alto, California, had revenue of $1.1 billion last year. It has delivered more than 240 satellites and has been in business for 50 years.
“Now that it has a manufacturing base, MDA should theoretically be able to bid on larger orders that they weren’t able to bid on before,” said Aubrey Hearn, a fund manager at Sentry Select Capital Corp. in Toronto, which manages C$7.5 billion in assets and holds MacDonald Dettwiler stock. “Before they were bidding on some contracts and they would just get the design part of the contract.”
Operating earnings at the combined company would have been C$5.94 a share last year instead of C$3.69, MacDonald Dettwiler said in a presentation to investors. Operating earnings before interest, taxes, depreciation and amortization would have jumped to C$345 million from C$194 million.
MacDonald Dettwiler plans to fund the purchase with cash, a three-year $101 million note and $514 million in debt under a credit line from RBC Capital Markets, the company said.
“This is the kind of deal we had been hoping for,” Sebastian van Berkom, president of Van Berkom & Associates in Montreal, said in a telephone interview. “It has a significant impact on the bottom line and it helps to diversify the business from a lot of government work to now commercial satellites and a lot more manufacturing. Plus with the way it’s financed, there’s no dilution to shareholders, which is fantastic.”
Van Berkom’s firm owns MacDonald Dettwiler stock as part of the C$1.8 billion in assets it manages.
MacDonald Dettwiler’s push into commercial satellites comes at a time of shrinking defense spending as governments in Canada, the U.S. and other countries seek to plug budget gaps.
Canada’s Department of National Defence plans to cut program spending by C$1.1 billion by the fiscal year starting April 2014, a decrease of 7.4 percent, according to the federal government’s March 29 budget. The government has said it will trim program spending by C$5.3 billion by 2014 to eliminate the country’s deficit.
“Governments generally are in tough shape,” said Hearn at Sentry Select. “They need to cut budgets. To rely solely on governments as a big customer is risky. We like that this deal has a much more commercial focus, and the government will be a much smaller part of the revenue.”
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