The partners who bought satellite communications provider Telesat five years ago have a problem – they have made so much money they can't agree what to do next.
But how did they do it?
Telesat has doubled in value, by some estimates, in the five years since it was sold by BCE Inc. for $3.25-billion to a pair of investors, Canada's Public Sector Pension Investment Board and U.S.-based Loral Space & Communications. The gain is all about margins, which have risen impressively.
Back-of-the-envelope calculations show that in the last year of BCE ownership, Telesat was turning about 54 per cent of its revenue into earnings before interest, taxes, depreciation, and amortization (EBITDA). By 2008, Loral and PSP had boosted that to 62 per cent. Today, that EBITDA margin stands at 77 per cent.
That's a huge gain, and enabled EBITDA to almost triple with not nearly as big a gain in revenue. Telesat did it by slashing costs, and increasing utilization of its fleet of satellites.
What's clear though, is those initial gains were low-hanging fruit. Since 2010, that EBITDA margin has barely budged. Nor has revenue. (The company is expecting a new satellite that just launched to start moving the revenue line higher in the second half of the year.)
For the investors, the result of the surge in EBITDA means a big win. Yes, EBITDA multiples - what investors will pay for a dollar of EBITDA - have not returned to what they were in 2007, but the underlying gain in earnings is more than enough to push the equity value of the company up two times.
The gain in the five years of ownership has been more than double, given the leverage employed. And therein lies the problem. Loral would face a huge tax bill if Telesat were to be sold, so it is reluctant. PSP, as a pension fund, doesn't pay taxes so it's keen to move ahead and cash in.
Given that the biggest increase in value seems to be behind Telesat, thanks to that huge jump in margins, it's not that surprising to see PSPIB looking to move on to other investments.