Mar 01, 2011

Cash-flush MDA Looks Beyond Canada for Growth

Estimated Article Reading Time: 4 min.

MUNICH – Canadian space hardware and services provider MDA Corp., flush with cash after selling its property information division, is hunting for an acquisition target in the United States, setting up offices in Moscow to harvest satellite communications contracts in that region and relocating its unmanned aerial vehicle military service business to Australia, MDA officials said Feb. 28.

The Richmond, B.C.-based company, which is facing a downturn in two of its businesses because of decisions by the Canadian government and the retirement of the U.S. space shuttle, views telecommunications satellite opportunities in Central and South Asia as far more promising than in North America.

Its geospatial-information business from the Radarsat 2 radar Earth observation satellite, meanwhile, has picked up the U.S. government as a regular customer after a long wait, a market opportunity unlikely to be reversed by ongoing U.S. government budget pressure, MDA Chief Executive Daniel E. Friedmann said.

In a conference call with investors, Friedmann said the new MDA Corp., now more clearly focused on satellite Earth observation and telecommunications, needs better access to the United States in order to realize its potential.

It was this same reasoning that lured MDA into accepting a buyout offer from ATK of Minneapolis, Minn., before the deal was vetoed by the Canadian government in early 2008. Canadian authorities have since increased their space spending to support Canadian industry, but not enough to keep MDA from running up against limits.

The imminent retirement of the space shuttle means the shuttle’s MDA-built robotic arm will no longer need servicing. With no Canadian space-robotics program on the horizon, Friedmann said, MDA will begin laying off employees in the robotics division in the coming months.

“We have given notice to people and have begun a controlled ramp-down of the business,” Friedmann said of MDA’s space-robotics division. “We do not see a Canadian long-term space plan anywhere, and we are precluded from working in the United States except for small projects.”

Securing access to more U.S. government markets appears to be a principal goal of MDA’s acquisition strategy. The company netted after-tax cash of $819 million from the January sale of its property information business. MDA Chief Financial Officer Anil Wirasekara said during the conference call that MDA now has 907 million Canadian dollars ($933 million) on hand.

“Our priorities are pretty clear,” Friedmann said of the eventual uses of this windfall, assuming it is not used to give shareholders an exceptional dividend.

“We want better market access, specifically in the United States. We have a strong objective to increase recurring revenue, and for the first time in this company’s history we have the resources to actually do something significant in that area. We’re obviously taking the opportunity to explore that.”

In addition to space robotics, MDA’s unmanned aerial vehicle (UAV) service business in Afghanistan, which MDA had said would soon be generating revenue of 100 million Canadian dollars a year, is facing the loss of its biggest customer — the Canadian government — when Canadian forces leave Afghanistan in July.

The Canadian armed forces accounted for nearly 50 million Canadian dollars in revenue in 2010. Friedmann said it will be hard to replace it with contracts from other nations, especially since Canada is no longer in the allied coalition fighting in Afghanistan.

Providing turnkey UAV surveillance services to coalition governments is a market niche that MDA believes it is uniquely positioned to offer, at least for now.

“It’s hard to be a leading member when your own government is backing away,” Friedmann said of MDA’s efforts to win customers in addition to Australia. He said he found it “mind-boggling” that Canada does not have its own UAV strategy. In this meantime, he said, MDA’s UAV operation is “moving to Australia, where they are committed long-term” to Afghanistan.

MDA has won awards amounting to more than 100 million Canadian dollars to provide electronics payloads for two telecommunications satellites, called AM-5 and AM-6, for the Russian Satellite Communications Co. of Moscow. In addition, the company has won a $254 million contract to provide a telecommunications satellite to the government of Ukraine — the contract includes the satellite’s launch — in a deal that was made possible by Canada’s export-credit agency, Export Development Canada.

Friedmann said Russia and the surrounding region will need numerous telecommunications satellites in the coming years and that MDA is opening a Moscow office to seize the opportunities. He said Export Development Canada has indicated it will support MDA’s efforts.

MDA’s Ukraine contract has been slowed in the past few months by the inability of Ukrainian authorities to secure the necessary broadcast frequencies from international regulators. Friedmann offered no opinion on whether the problem would be solved soon, or whether a lack of a resolution could put the contract in jeopardy.

Excluding its now-discontinued property information business, MDA reported 689 million Canadian dollars in revenue in 2010, up 33 percent over 2009. Radarsat 2 imagery sales, the Russian and Ukrainian satellites and early work on Canada’s Radarsat Constellation Mission all contributed.

Operating earnings before interest, taxes, depreciation and amortization was 24.7 percent of revenue, up slightly from 2009. Backlog at Dec. 31 stood at 998 million Canadian dollars, up 9 percent from a year earlier.

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