Key takeaways from Maxar response to Spruce Point:
— Company audit, with KPMG, has found no basis in Spruce Point allegations; board renews confidence in company management.
— SSL’s Palo Alto, California, facility’s real estate is valued at $150-$200 million.
— A decision on future of SSL’s GEO satellite business, and Palo Alto, including shutting it down, to be made by end of this year.
— Telesat LEO satellite manufacturing contract to be worth $3 billion to winning team.
— Maxar disputes Spruce Point forecast of renewal pricing for U.S. NGA EnhancedView contract, which expires in 2020.
CENTER HARBOR, New Hampshire — Maxar Technologies, its stock feeling th heat of a full-on negative assessment by short seller Spruce Point Capital Mangement, on Aug. 24 issued a detailed response to Spruce Point’s allegations and said a just-completed audit review with KPMG has reaffirmed its previous financial disclosures.
The Maxar board also “reaffirmed its full confidence in the company’s management team,” Maxar said in a statement. The Spruce Point assessment, issued Aug 7, had been particularly searing with respect to Maxar Chief Executive Howard L. Lance and his previous business history, notably at Harris Corp.
Maxar, in its response, added details to its current business that it had not previously disclosed. Highlights:
— Maxar believes that the value of a satellite production contract from Telesat of Canada for Telesat’s low-orbiting constellation of satellites would be $3 billion, which would be divided between Maxar and Thales Alenia Space of France and Italy. The two companies’ bid is competing with Airbus Defence and Space for the Telesat work. Telesat has said it would select a winner in 2019.
— The real estate value of Maxar’s Palo Alto, California, satellite manufacturing plant is estimated at between $150 million and $200 million. Maxar’s SSL satellite division is suffering the dramatic drop in orders for geostationary-orbit satellites, built in Palo Alto.
Maxar has said it is exploring strategic alternatives for the GEO business and the Palo Alto site, including simply shutting it down.
“A decision on the future strategic direction of the GEO communications satellite business is expected to be made by the end of 2018,” Maxar said. “As a result, this line of business may be classified as a discontinued operation.
“The Company expects that under certain of these scenarios, non-cash write-downs or an impairment of assets could occur as a result of lower future revenue expectations, industry outlook and overall valuation of the GEO communications satellite line of business.”
— Maxar’s DigitalGlobe geospatial imagery and services division is viewed as a growth vector to compensate for the drop in large-satellite orders. Spruce Point alleged that the U.S. National Geospatial-Intelligence Agency (NGA)’s 10-year, $3.5-billion contract with DigitalGlobe, which expires in 2020, will renew at a materially lower level given the newly competitive environment in providing geospatial imagery.
Maxar does not address this point directly, but says it is “confident in its ability to extend or renew the EnhancedView contract with the U.S. Government. The Company has a two-decade long track record providing excellent value and services to NGA and believes that it is the only company positioned to meet the ongoing mission requirements.
“The Company has met or exceeded its contractual service level agreements for 72 consecutive months. Importantly, the Company believes that the hedge fund’s report contained highly inaccurate calculations and conclusions regarding imagery collection market pricing. NGA has, in fact, received increasing value over the course of the EnhancedView fixed-price annual contract, as the Company has added more capable satellites, more collection capacity and services to satisfy its critical national missions.”
— Spruce Point pointedly criticized Maxar’s management-compensation practice, saying it did not properly align the executive team’s financial interests with those of shareholders. Maxar denied this, saying recent compensation metrics have addressed any past issues.
“Management compensation incentives are aligned with the interests of all shareholders and tied to financial performance. The Company’s short-term incentive program rewards management for achievement of financial targets established annually by the Board of Directors.
“Beginning in 2018, a metric for cash flow was established in addition to revenue and adjusted EBITDA metrics, appropriately recognizing the increased debt and leverage resulting from the DigitalGlobe transaction. Beginning in 2019, at least 50% of the Company’s long-term incentive program awards for senior executives will include performance-based equity metrics.
— Spruce Point specifically called for Lance’s resignation, pointing to his past business career and his current stewardship of Maxar. Maxar’s board is standing behind Lance and said he had recently purchased additional Maxar shares.
“Mr. Lance, the Company’s President & Chief Executive Officer, purchased an additional 23,725 shares for his personal account between August 3, 2018 and August 10, 2018. In its 2018 Management Proxy Circular, the Company disclosed that Mr. Lance owned 603,144 shares as of that date.”