MDA wins key foothold in U.S. with Loral deal

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Canadian space technology company MacDonald Dettwiler and Associates Ltd. has finally struck the deal it hopes will open the floodgates to the lucrative U.S. market – and erase the bad memory of an attempted 2008 divestiture that was killed by Ottawa.

MDA agreed to acquire the satellite manufacturing division of Loral Space and Communications Inc. for $875-million (U.S.), putting the world's largest maker of communication satellites in the hands of the Richmond, B.C., company.

MDA shares soared 28 per cent on the news, as investors bet the combined company will be a satellite powerhouse and rapidly build market share in the U.S., something that has eluded the company due to its lack of U.S. operations.

"This gives us the critical mass in the U.S. to win business we are unable to win at this point," said MDA chief executive Daniel Friedmann.

Loral's space manufacturing division is a 50-year-old business based in Palo Alto, Calif., with 3,200 employees and a 30 per cent market share. The deal will more than double the size of MDA, with combined 2011 revenues of about $1.9-billion. The Loral division will also fatten MDA's order backlog, which stood at $765-million as of March 31. With Loral's contributions, it would be $2.8-billion.

"Fundamentally, it will mean the combined company will grow and employment in Canada and the U.S. will grow," Mr. Friedmann said.

The deal culminates an about-face for MDA that was not of its choosing. In 2008, MDA agreed to sell its space business, including ownership of its Canadarm technology, to U.S.-based Alliant Techsystems for $1.3-billion. But Ottawa blocked the sale on national-security grounds, its first such move since the Investment Canada Act came into force in 1985.

That still leaves a bitter taste with MDA. "I don't want to talk about history," an irritated Mr. Friedmann said. "It was very hurtful to the company. We would have been much bigger today... It was negative for government, it was negative for the company and it was negative for Canada."

After sticking MDA with a division that had limited growth opportunities in the U.S. due to its lack of a U.S. presence, Ottawa handed contracts to the company through its Canadian Space Agency. But government budget cuts later forced MDA to cut more than 150 jobs.

Meanwhile, MDA sold its real estate information business for $850-million in early 2011, bought back 23 per cent of its stock last October for $500-million and looked for acquisition opportunities in the U.S. "They played the hand they were dealt, and they played it well," said BMO Capital Markets analyst Thanos Moschopoulos.

The satellite deal's merits are considerable. Analysts estimated MDA's 2013 earnings could increase by as much as 50 per cent over previous estimates, to $5.98, according to Mr. Moschopoulos. The purchase also reduces MDA's dependence on governments.

Mr. Moschopoulos said the purchase should pay off quickly for MDA. "Now that they have this U.S. platform, they're a shoo-in" to win a couple of upcoming robotics contracts from U.S. agencies, he said.

Loral's customer list is dominated by commercial satellite operators, with further growth expected to be driven by demand for high-speed broadband Internet, digital TV and video broadcasting, and from developing economies. MDA's share of revenues from government customers will shrink to about 30 per cent from two-thirds with the deal.

The deal also delivers a rare bit of good news for Canada's beleaguered tech sector, which accounted for as much as 39 per cent of the TSX composite index in 2000 but, after the demise of Nortel Networks, the decline of Research in Motion and a string of foreign buyouts, has fallen to just 1.2 per cent . "The technology space has been surviving very well," globally, said Salman Partners technology analyst Naser Iqbal. "But getting good investments in technology in Canada have been hard to come by."

Loral's other main holding is a 64 per cent stake in satellite operator Telesat Canada.