George Soros (Trades, Portfolio) is widely respected for the incredible successes of his Quantum Fund. However, he continues to run his own money and his moves are closely watched. GuruFocus recognizes him for having the best performance record of any investment fund in the world over its 26-year existence with a cumulative 32% annual return. Recently he added to his position in Loral Space & Communications Inc. (LORL, Financial) of which he now owns 1,077,127 shares bought for an average price of $65 each. The shares now trade at $44; he added a few which tells us he still likes it.
What’s the deal here?
It is actually fairly straightforward. Loral Space & Communications derives almost all of its value from its 62.8% economic interest in Telesat Holding, a global satellite services operator. These satellites provide reliable, high-bandwidth services to coverage areas on earth. Unfortunately the company only owns a 32.7% voting interest in Telesat Holdco; because it has no control, it would presumably rather sell the stake.
If you scan the valuation metrics of Loral Space & Communications, it does not appear attractive at all. Why would anyone want to own this, let alone a famous superstar investor? What makes Loral Space & Communications so interesting is that it owns no long-term debt, although Telesat does and sports a market cap of just $1.38 billion. The market cap is a shrill contrast with the value of its 62.8% economic interest in Telesat.
Telesat is privately held between Canada’s Public Sector Pension Investment Board and Loral but it publishes its financials (watch out they are in Canadian dollars). What we learn from that is Telesat probably produces an adjusted EBITDA of around $800 million.
Other satellite companies like Intelsat (I, Financial) and SES Global trade at respectively 8.28x EBITDA and 10.27x EV/EBITDA multiples which leads me to believe the Telesat equity is worth somewhere in the ($6 billion to $2.9 billion of long-term debt) ballpark. Let’s round down and say give or take $3 billion. That puts the value of Loral Space & Communications equity at $1.88 billion. Curiously that is $500 million above the entire market cap of Loral, which itself also holds some cash on its balance sheet. None of that matters if the cash would be trapped forever but in its more recent quarterly report Loral writes (emphasis mine):
Our principal asset is our majority ownership interest in Telesat Holdco. In an effort to maximize shareholder value, we have been exploring potential strategic initiatives with respect to that interest. The initiative to monetize our interest in Telesat Holdco through the sale of Loral terminated earlier this year.
While we remain interested in a sale transaction, in our continued efforts to maximize shareholder value, we have been exploring other potential strategic initiatives to alter the status quo in our ownership of Telesat Holdco.
Soros looks to be making an old-fashioned pay 50 cents for a dollar value investment here. No fancy reflexivity theories here but straight up Graham style. He isn’t the only one, either, as the stock is a real hedge fund hotel with also many gurus holding shares including Mario Gabelli, Leon Cooperman, Joel Greenblatt and Jim Simons.
