Loral leftover could be winner Communications satellite business may become lucrative

January 10, 1996|By Michael Dresser | Michael Dresser,SUN STAFF

Lockheed Martin Corp.'s $9.1 billion acquisition of Loral Corp.'s defense electronics business was a blockbuster deal by anyone's standards, but the most intriguing aspect of the deal could be the part of Loral that got away.

As part of the agreement, Loral's holdings in the risky but potentially lucrative satellite communications business were split off into a new company called Loral Space and Communications Corp.

Bethesda-based Lockheed Martin came away with a 20 percent stake in the new corporation, at a cost of $344 million. But significantly, this was the part of the business that Loral Chairman Bernard L. Schwartz chose to keep under his control.

Mr. Schwartz, who will join Lockheed Martin as vice chairman and a board member, will assume the position of chief executive of Loral Space.

Analysts said Mr. Schwartz's decision bodes well for the new spinoff, noting that the highly regarded executive will be able to concentrate his attention on the satellite communications business.

"He's very interested in it. He's a young 70-year-old. He's a master of creating value in complicated situations," said Michael Culver, managing director of First Equity Development Inc., a Stamford, Conn., investment bank that specializes in the aerospace business.

Loral Space will present Mr. Schwartz with an abundance of complications -- and opportunities. The company will start with $700 million in cash and no debt, but its need for investment capital is even greater than that sum.

The new company's principal assets will be its 31 percent interest in Globalstar, an ambitious plan to create a worldwide satellite communications system, and a 33 percent stake in Space Systems/Loral, a commercial satellite manufacturing firm with sales of $1 billion a year. In a previous incarnation, Space Systems/Loral was known as Ford Aerospace.

Other assets will be Loral's interest in several direct-to-home satellite television projects and a 22 percent interest in K&F Industries, an aircraft braking company with $250 million in annual sales.

Of these, Globalstar is regarded as the riskiest proposition. The venture, for which Loral Space will be managing partner, is envisioned as a chain of 48 low- Earth-orbit satellites capable of providing worldwide voice, data, fax and position-locating services. The system is expected to be running in 1998.

While the notion of an anytime, anywhere global communications system is the stuff of science-fiction, there is no certainty that demand will be sufficient to repay the cost of launching the system.

Mr. Schwartz said Monday that the reason Loral Space was not included in the acquisition was that Lockheed Martin balked at ++ paying what he thought Loral's stake in Globalstar was worth.

Lockheed is not alone in its wariness. Last year, investors balked at financing several ambitious satellite communications schemes, including a $400 million debt offering for Globalstar and a similar offering for Motorola Inc.'s competing Iridium project.

While Lockheed Martin stopped short of acquiring Globalstar, the investment it did make in Loral Space gives the project added credibility in its efforts to raise the $2 billion cost of building the system.

"It gets them over the hump. I don't know if it gets them to 100 percent," Mr. Culver said. He noted that Globalstar's stock, which is traded independently, rose about $6 Monday after the deal's announcement.

Mark Chartrand, a Baltimore-based satellite industry analyst, said that of the various global satellite communications projects on the drawing board, Globalstar could be the most promising.

Mr. Chartrand, president of Didactech, said the Iridium project is based on the assumption that globe-trotting executives will be willing to pay $3 to $4 a minute for instant phone calls from anywhere.

"Globalstar is talking a fraction of that, so hopefully they would have a broader market," said Mr. Chartrand. He said Globalstar would be less costly than Iridium because it would use fewer satellites in a higher orbit.

The second major component of Loral Space, the satellite manufacturing arm, probably was left out of the deal because of antitrust concerns, Mr. Chartrand and Mr. Culver agreed. Loral and Lockheed Martin have been among a handful of U.S. companies competing in that business.

"If they had gobbled up Space Systems/Loral intact, I think it would raise antitrust questions among some people in the government," Mr. Chartrand said.

Mr. Culver said that for the most part, the businesses that are being consolidated to create Loral Space fit well together. The one exception, he said, was the aircraft braking business. He added that he would not be surprised if that unit were sold off.

One area in which Loral Space will be playing catch-up is direct broadcast services (DBS), where Loral has lagged behind Hughes Electronics' DirecTV and other providers.

"I would expect that if Loral's going to get into the DBS industry, they're going to have to get into some strong partnership for content," said Mr. Chartrand.

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