US communications equipment maker Comtech Telecommunications has retained Citigroup to help it explore strategic alternatives, including a possible merger or sale of the company.
The group, which made the announcement in response to media reports over…
US communications equipment maker Comtech Telecommunications has retained Citigroup to help it explore strategic alternatives, including a possible merger or sale of the company.
The group, which made the announcement in response to media reports over the weekend, said that it would consider “a broad range of strategic alternatives with the goal of maximising shareholder value”.
The company has not set a timetable to complete its evaluation and has pointed out that there can be no assurance that any transaction or other strategic change will take place.
Proskauer Rose is providing legal advice on the process.
According to Raymond James analyst Chris Quilty, valuation will be key to any deal. In a research note he wrote: “With the stock currently trading at a multiple of 7.3x consensus FY15 EBITDA of US$62m (versus a trailing five-year average of 4.8x), the stock is not inexpensive. Comtech’s annual revenue has declined 17% on average from FY11-14 and the consensus outlook for FY2015-16 suggests a 4% top-line CAGR on a go-forward basis. Consequently, we would be hard pressed to justify a premium over the stock’s current valuation.”
Prior to the announcement, Comtech, which is debt free, had a market capitalisation of around US$552m. However, following the release, the share price leapt by as much as 12% increasing the company’s value to US$590m.
Comtech’s core business is its satellite modem products. These are based on Single Carrier per Channel (SCPC) technology while the majority of its competitors use Time Division Multiple Access (TDMA) technology.
Assessing the potential bidders from other companies that specialise in satellite modem technology, Quilty suggested it would be a tough fit for all of them. He listed Hughes, iDirect, ViaSat, Teledyne, Newtex, Gilat and CPI International.
Of these, he argued that Hughes has a non-compatible IPoS (Internet Protocol over Satellite) standard; iDirect is focused on organic growth; ViaSat is focused on consumer broadband; Teledyne is price sensitive; and Newtec and Gilat are likely to be priced out.
CPI was actually subject to a US$473m bid by Comtech back in 2010 but the merger was cancelled and the former was subsequently snapped up by private equity firm Veritas Capital.
The following year, with growing shareholder criticism over the strategic direction of the company and a perceived undervalued stock, the board of Comtech revealed that it had hired external advisers to look at strategic alternatives.
Reports at the time claimed the company had held early stage talks with a number of large aerospace and defence contractors including Airbus, General Dynamics Corp, Harris Corp and BAE Systems.
Ultimately none of these led to anything and the company assuaged its shareholder discontent through an increased dividend and share buybacks.
