Can Loral Space & Communications Inc. (LORL) Double and Prove Hedge Funds Right?

Activist Mark Rachesky  has a huge position in Loral Space & Communications Inc. (NASDAQ:LORL) and he has been adding to his holdings. According to  a recent filing “on March 4, 2016, Master Account II Holdings, Capital Partners (100) and Institutional Partners III acquired an aggregate of 209,700 shares of Common Stock in block trades for aggregate consideration (excluding commissions) of $7,048,925”. Now Rachesky controls 39% of LORL’s voting shares. The details of this filing can be found below.

Rachesky isn’t the only high profile hedge fund investor with a large position in the stock either. Chris Pucillo, James Dondero, and billionaires Leon Cooperman and George Soros have large stakes in the stock too. Most investors get excited when they see billionaires like Cooperman and Soros pile on a stock. This isn’t always a strong buy indicator. For example, last year Leon Cooperman was involved with a company that lost 90% of its value. Cooperman said the following when he was asking a question to the CEO of this company: ” I must admit to having a certain amount of lack of knowledge of your business, but I have a partner that’s done a terrific job in staying on top of you”. We now know that Cooperman’s partner didn’t do his homework properly and was probably attracted to this stock because of the presence of other hedge funds in the stock. However, I get excited when long-term activist investors like Chris Pucillo get involved. This is the main reason I am taking a closer look at Loral Space & Communications Inc.

So, why are hedge funds interested in LORL and should we imitate them?

Loral Space & Communications isn’t a widely covered stock and our best bet is to go through its regulatory filings to understand the fundamentals of this stock. I spent a few hours on its 10-K and previous hedge fund filings. It is clear that LORL is really a holding company that owns 62.8% of Telesat, fourth largest satellite operator in the world. Unfortunately, a Canadian pension fund, Public Sector Pension Investment Board (PSP), controls about two thirds of Telesat’s voting shares even though it owns slightly more than a third of the satellite operator. Hedge funds believe Telesat is worth anywhere from $2.5 billion to $4 billion and Loral’s stake in the company is worth anywhere from $1.5 billion to $2.5 billion. Since Loral’s current market cap is about a billion US dollars, the stock potentially has an upside of 50% to 150%.

Mark Rachesky has been trying to unlock this “value” since 2014 by trying to sell Telesat to PSP, force PSP to agree on an IPO of Telesat, or sell Loral. Telesat’s business is mainly a fixed cost business. It owns 15 satellites and currently investing in another satellite. Telesat spent CAD 229 million in 2015, CAD 108 million in 2014 on capital expenditures. It will be spending another CAD 413 million on the construction of satellites and other capital expenditures in the next few years. I am not convinced that spending half a billion dollars on a single satellite is a good idea but overall, Telesat, will still be generating a lot of cash from its existing satellites at least in the short-term. I attended the Harbor Investment Conference on March 8th and one of the most interesting presentations I heard was by Bessemer Venture Partners’ David Cowan. Cowan talked about recent developments in satellite technology.

Bessemer Venture Partners sold Skybox Imaging -which launched low cost satellites into space- to Google for $500 million in 2014. It may be possible that Skybox Imaging or other start-ups can use the same or similar technologies to compete with Telesat extremely effectively given that their cost is significantly lower. I don’t think these types of start-ups are on the radars of most investors but they could really disrupt satellite companies like Telesat in the next 5-10 years. If you are planning to follow hedge funds into LORL, you really need to do an in-depth analysis of this emerging space. I don’t think Mark Rachesky, Leon Cooperman or George Soros have a complete understanding of these companies that are on the cutting edge of space technology. Hedge funds are in the stock because they believe that they will be able to sell the company at a premium.

I don’t think this is very likely in the short-term because they don’t control Telesat and PSP has the upper hand in negotiations. The only way I can see a deal happening is that LORL agrees to sell itself at a discount to PSP. I am not sure this may happen before Telesat’s business is negatively affected by technological obsolescence. I should also disclose that I would have made a very large investment in LORL if MHR bought its 39% stake at today’s extremely low prices. MHR would have been more inclined to do a deal at a 30-50% premium to today’s prices if its cost basis was $35. I don’t think they will agree to sell LORL for $50/share given that their cost basis is much higher.

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