The board of directors of US-based communications products developer Comtech Telecommunications has responded to shareholder criticism by announcing a 10% increase in its dividend, raising its share buyback programme to US$250m and appointing Edwin…
The board of directors of US-based communications products developer Comtech Telecommunications has responded to shareholder criticism by announcing a 10% increase in its dividend, raising its share buyback programme to US$250m and appointing Edwin Kantor as its lead independent director.
The moves were revealed as part of the company’s full year fiscal 2011 results and came just a day after MMI Investments, a hedge fund that owns 3.3% of Comtech, wrote to the board criticising the strategic direction of the company and nominating two independent directors for election, former Motorola and AT&T executive Samme Thompson and Jerome Lande, a general partner of MMI.
In its letter to the board, MMI highlighted its concerns over Comtech’s strategy of seeking to bolster growth through acquisitions and suggested that the company itself should consider a potential sale.
Lande, who was the signatory on the letter, stated: “While we admire Comtech’s leading market shares and strong cash flows, we believe these strengths are terrifically undervalued by the stock market due to serious and legitimate concerns regarding Comtech’s past performance, future strategy and corporate governance and compensation structures. Specifically, we believe Comtech’s weakness in operations, business development and capital allocation, and the risks in continuing its potentially destructive acquisition strategy in the current seller’s market, send a clear message: there is an urgent need for change at Comtech.
“Comtech’s stated strategy to augment anaemic organic growth with acquisitions puts the company at tremendous risk given the historically high M&A multiples currently being paid in its industry. As we believe Comtech has seen firsthand having been outbid on several recent transactions, the levels of competition and valuation in recent auctions have far outstripped expectations. With recent transactions at roughly 3x Comtech’s current EBITDA trading multiple and the number of remaining appropriate targets shrinking, we believe Comtech is far more likely to destroy value through acquisitions than to create it. We believe the market shares this view, and that fear of such an outcome has created an overhang on the Comtech share price.
“We believe there are several alternatives to enhance value that an improved Comtech Board would be wise to consider in the current environment. Among others, these include cash repatriation strategies (through a special dividend or drastically increased share buyback plan) as well as a potential sale of the company. We are confident that many well-capitalized strategic and financial acquirers would express interest if presented with the opportunity to acquire Comtech, which we believe could generate a transaction value of US$38-US$45 per share, or a premium of 43% to 70%, assuming eight to eleven times consensus estimated fiscal 2012 EBITDA (in-line with historical precedent transactions).”
Responding to the hedge fund’s comments on 13 October, Comtech chairman and CEO Fred Kornberg, and the newly appointed Kantor, reaffirmed their commitment to creating shareholder value in a letter to all its stockholders.
“Comtech expects to continue to return cash to our stockholders while ensuring we retain the ability to implement our acquisition strategy,” the letter stated.
“We have a long history of being both disciplined and diligent in pursuing our acquisition strategy. In being good stewards of our stockholders’ capital, we will remain disciplined on price. We have sought, through our stock repurchase and dividend programs, to strike a prudent balance between returning cash to stockholders and retaining cash on-hand to be opportunistic about attractive acquisition candidates.”
The letter continued: “Your board and senior management team, after consultation with the company’s external advisors who have substantial industry and capital markets experience, routinely evaluate the company’s strategic alternative analyses and future prospects. We remain confident that we are on the right course to deliver a highly attractive return and value for our stockholders.”
Comtech did not disclose the identity of its external advisers, but unconfirmed reports suggest it is working with Goldman Sachs for defence and strategic advice as several government contractors encircle the firm to potentially attempt a takeover.
Large aerospace and defence contractors such as EADS, General Dynamics Corp, L-3 Communications, Harris Corp and BAE Systems could all be interested in acquiring the group, reported Reuters citing people familiar with the situation.
On 27 September, Comtech released its fourth quarter and full year fiscal 2011 results, reporting a fall in net sales for both. Q4 sales were down US$116.7m year-on-year to US$140.3m, while FY sales fell by US$165.8m to US$612.4m. Comtech blamed the sales slump on the failure to retain the US Army Blue Force Tracking and Mobile Tracking Systems communications contracts.
While adjusted EBITDA also fell, it did so to a lesser extent, down US$4.5m to US$135.5m for the year. The company also retains a significant cash pile of approximately US$558.8m.
Kornberg has previously stated that the company would use some of this available cash to fund potential acquisitions as well as for share repurchases.
Having allegedly been priced out of a number sales auctions, such as for satcoms RF antenna developer CPI International and ground control system manufacturer Integral Systems, Comtech is now seeking to assuage the disquietude of some of its investors by using a portion of this money to increase its buyback programme from US$150m to US$250m and up its dividend by 10% from US$1 per share to US$1.10 per share.
