NEW YORK (Reuters) - Loral Space & Communications Inc (LORL.O), which holds a majority stake in Canadian satellite communications company Telesat Holdings Inc, has selected private equity firm Apax Partners LLP and two Canadian pension funds to negotiate a sale of Telesat, people familiar with the matter said.
The move marks a key step in a complex auction process for Loral, in which financial investors who covet control of Telesat need to bring another Telesat shareholder, Canada's Public Sector Pension Investment Board (PSP), onboard.
Loral, which derives almost all of its value from Telesat, holds a 62.8 percent economic interest in Telesat but only 33.3 percent of its voting stock. PSP has a 35.3 percent economic interest and 66.7 percent of the voting power, according to regulatory filings.
Therefore, any buyer seeking control of Telesat would also need PSP's agreement.
The three parties chosen by Loral - Apax, the Canada Pension Plan Investment Board (CPPIB) and the Ontario Teachers Pension Plan - are now expected to negotiate with PSP about a deal, although the exact next steps are not yet clear.
At stake is a leveraged buyout that could reach $6 billion to $7 billion, making it the second largest so far this year following Cerberus Capital Management LP's $9.4 billion merger of its Albertsons supermarket chain with Safeway Inc SWY.N, which was announced earlier this month.
The people asked not to be identified because the talks are private. Loral, Apax and CPPIB declined to comment, while representatives of Telesat, PSP and Ontario Teachers did not respond to requests for comment.
Loral and PSP jointly explored the sale of Telesat to other companies in the sector and private equity firms three years ago, seeking as much $7 billion, but could not agree on a price. The experience soured the relationship between Loral and PSP, whose co-ordination would be needed for a joint sale of Telesat.
This time, Loral is looking to sell itself, rather than only its stake in Telesat, partly to avoid a big tax bill, according to sources. If Loral were to sell its Telesat stake, both the company and its shareholders would be subject to taxes on the proceeds.
Loral is working with Credit Suisse Group AG CSGN.VX to find a buyer, people familiar with the matter told Reuters in January.
Loral's board of directors separately hired boutique investment bank Perella Weinberg Partners for independent advice because the company's top shareholder is playing a key role in the sale process, Reuters reported early this month.
Loral's biggest shareholder is hedge fund veteran Mark Rachesky's MHR Fund Management LLC, which holds 38 percent of Loral's outstanding voting common stock. Rachesky, who co-founded MHR in 1996 after working for activist investor Carl Icahn for six years, is seen as key to the process. An MHR representative had no immediate comment.
Apax and the two Canadian pension funds have prevailed over other parties that were considering a deal. Private equity firms Carlyle Group LP (CG.O), KKR Co & LP (KKR.N) and Onex Corp OCX.TO are no longer in the running for Loral, people familiar with the matter said.
Representatives for those parties either declined to comment or did not immediately respond to requests for comment.
With headquarters in Ottawa, Telesat is the world's fourth-largest provider of fixed satellite services, behind Intelsat SA (I.N), SES SA SESFg.LU and Eutelsat Communications SA (ETL.PA), according to the company's latest annual report.
Loral and PSP acquired Telesat in 2007 for $3.42 billion from one of Canada's major phone companies, BCE Inc (BCE.TO). In 2012, Loral sold its space systems subsidiary to MacDonald, Dettwiler and Associates Ltd (MDA.TO), leaving Telesat as Loral's main asset.
Apax may have an edge in the auction due to its strong links to PSP. PSP is a major Apax fund investor and has joined a few of its private equity deals as a co-investor. One of PSP's vice presidents, Jim Pittman, is chairman of the independent board of advisers of some of the Apax funds.
Apax is also no stranger to the satellite services sector, leading a private equity consortium that took Intelsat private in 2005 and selling it to buyouts firms BC Partners Ltd and Silver Lake in 2008.
Reporting by Soyoung Kim and Greg Roumeliotis in New York; Editing by Bernard Orr