Interesting Speculation About Telesat

Back on November 28th, 2010, under the title "Telesat Sale Could Net up to $7 Billion," I commented on a Bloomberg report that stated the closely held Canadian icon had brought in JPMorgan Chase & Co., Morgan Stanley and Credit Suisse Group AG to expedite the sale of the company.

Telesat fleet map from the Telesat website.

Since then, others (like Chris Forester in his February 4th, 2011 Advanced Television article "Intelsat and Eutelsat want Canada’s Telesat") have speculated over just who that eventual buyer could end up being. The front runner right now is Intelsat, but no one has so far suggested a good reason why Telesat shareholders would want to sell the company or why Intelsat would want to buy.

Here's a theory, suggested to me by either a low friend in a high place or a high friend in a low place (you get to be the judge).

Telesat's had two record years for revenues and EBITDA ("earnings before interest, taxes, depreciation, and amortization") so they don't really need an influx of cash.

Telesat President Dan Goldberg.

But Telesat is also the prime contractor for controlling Radarsat 2 (as per the May 7th, 2007 announcement "Telesat to Operate RADARSAT II" on the BCE website), recently made a proposal for the Polar Communication and Weather (PCW) satellite (that pretty much redefined the mission) and also owns thirteen telecommunications satellites covering Canada, the Americas and the Atlantic Regions plus operates another eleven for others.

In other words, Telesat has good contracts providing good cash flow and a reasonable expectation of strong ongoing earnings. The only place where it could expect to save money is by cutting salaries, laying off employees and merging its satellite control center with another satellite firm.

How does that work?

Well, a few years ago Telesat merged with Loral Skynet, which was about equal in size to Telesat then but is now essentially non-existent, except for a small sales office in Bedminster, New Jersey. The value in the Telesat/ Loral Skynet merger was the savings made by cutting salaries and operational costs when the two firms merged their control centers.

In this specific case at least, Canada got to keep the jobs and the control center, but that might not happen with an Intelsat merger. Intelsat is over twice the size of Telesat and can easily handle the additional burden from Telesat satellites within their existing facilities. Keeping two fully functional control centers is just not sound business so one is likely to close and Telesat has the smaller facility.

Intelsat HQ in Washington, DC.

But there is also another angle.

If operations are consolidated into the US, Intelsat isn't restricted by US legislation such as the International Traffic in Arms Regulation (ITAR) when managing existing or pursuing new business.

If Intelsat maintains two offices and control centers the US manufacturers will need to go out of their way to jump through ITAR hoops for a Canadian division with expensive Canadian offices and a nice historic Canadian legacy, but not really all that much of a business reason for continued existence.

Of course, that isn't likely going to happen.

If and when a sale or merger goes through (and Telesat evecutives have given every indication that this is what they want), jobs will be lost, executive functions will be merged and duplicate facilities will be closed.

But in Canada, most people won't care because television and telephone won't be effected (they'll just be owned by others).

However, the Canadian government just might care, if only because they spent so much time and effort three years ago to keep RADARSAT II Canadian and an Intelsat/Telesat sale or merger would likely close down the Canadian satellite controller and route operations through Intelsat's US facility.

Perhaps someone should tell the government what just might be going down.