Canadian satellite operator Telesat Holdings Inc. has been such a strong performer since BCE Inc. sold the business in 2007, its current shareholders can't agree on how to cash in.
On one side is the Public Sector Pension Plan Investment Board, a Montreal-based fund that manages retirement money for federal employees, including the RCMP. It wants to sell its 36-per-cent stake, or at least part of it, after making what sources said is a huge profit on its investment.
On the other side is New York-based investor Mark Rachesky, who controls the company that owns the other 64 per cent of Telesat - and who doesn't want to sell.
The result of the conflict: PSP Investments is now forcing its partner into an initial public offering of Telesat, the satellite company that supports the TV services of BCE and Shaw Communications Inc., and facilitates communications in Canada's Far North. Observers say the business is worth as much as $6-billion; if the IPO goes ahead and the company is listed on the Toronto Stock Exchange, it would rank as one of the largest 100 public companies in Canada.
Regulatory filings and interviews with sources reveal that even behind the most successful deal, shareholder differences can fester. PSP two months ago informed its partner on the deal, Loral Space & Communications, that it was exercising its right under their shareholders' agreement to require Telesat to go public.
Loral is a publicly-traded U.S. holding company, but it is also essentially a vehicle of New York hedge fund MHR Fund Management LLC, which was founded in 1996 by Mr. Rachesky, a former managing director for billionaire activist investor Carl Icahn. MHR owns most of Loral's equity; Mr. Rachesky is chairman of both Loral and Telesat.
Loral spokeswoman Wendy Lewis said in an e-mail that Loral is "supportive of PSP's request for an IPO but there are a number of things to be worked out before it can happen" including the revision of a shareholders' agreement. Meanwhile, Loral chief executive officer Michael Targoff said last month his company had no intention of selling any shares in an IPO.
The move by PSP was no less than the third attempt to cash in on the investment in the world's fourth-largest satellite services operator since 2010. "There's a huge tension between the shareholders," said one source familiar with the situation. Both PSP and Telesat declined to comment.
In many ways, the rift is an unintended consequence of Telesat's solid performance since the partners teamed up to buy the Ottawa-based firm for $3.25-billion in 2007. Telesat, under CEO Daniel Goldberg, has increased revenues and profitability through a string of successful satellite launches and tight cost controls. The company, which earned $237-million in profit on $808-million in revenue last year, has a fleet of 13 satellites.
Neither investor was expected to hang on to Telesat for the long haul, but each has a different set of circumstances that weigh on their longer-term intentions. The chief difference between the two is the tax implication of a change in ownership. While PSP is exempt from paying income tax, Loral has been careful to ensure any deal minimizes its tax bill.
That has been tricky because Telesat has been such a successful investment for Loral. Sources familiar with the situation say Telesat's 2010-11 strategic review brought matters to a head. A sale process brought out several interested bidders and PSP Investments was happy with the prices. But Loral was concerned a sale would leave it with a huge tax hit.
"The two couldn't agree on anything," one source said.
So instead, the two parties agreed to recapitalize Telesat, increasing its debt burden by close to $500-million and paying themselves $705-million in dividends. Loral's share of the proceeds, $420-million, enabled it to recover all of its original investment - without triggering a tax hit.
Also contributing to tensions was the fact Loral was limited to 33-per-cent voting control in the original deal to stay onside with foreign ownership rules. The federal government dropped the rule in 2010, but Loral was bound by its original deal to its minority voting position.