Communications products developer Comtech Telecommunications is to acquire CPI International, the parent company of Communications & Power Industries, for approximately US$472.3m in a cash and stock transaction. CPI develops RF microwave amplifier…
Communications products developer Comtech Telecommunications is to acquire CPI International, the parent company of Communications & Power Industries, for approximately US$472.3m in a cash and stock transaction. CPI develops RF microwave amplifier products for sectors including satellite communications, defence and medicine.
Under the terms of the definitive merger agreement, Comtech will fund the acquisition through US$372m of its existing cash and around 4.4 million newly issued Comtech shares.
On completion, Comtech also plans to repay all of CPI’s existing debt, again via existing cash resources rather than through any new financing facility. Comtech expects that, upon closing, it will have between US$150m and US$200m of cash and cash equivalents.
The ultimate amount of consideration for each CPI shareholder will be a combination of US$9.00 in cash plus a fraction of Comtech common stock equal to US$8.10 divided by the average closing price of Comtech common stock over a specified period of time prior to closing.
Based on Comtech’s share price of US$31.06 as of May 7, 2010, when the merger agreement was signed, the offer price values CPI at approximately US$16.40 per share, representing a premium of 25.7% to the last closing trading price of CPI common stock and 21.3% to the 30 trading day average closing price.
CPI reported 2009 annual sales and EBITDA of US$338.5m and US$56.4m, respectively, meaning that the purchase price represents an acquisition multiple of 8.4 times EBITDA and 1.4x revenues.
Commenting on the transaction, Fred Kornberg, president and chief executive officer of Comtech, said, “CPI is a unique business and a leading global supplier of vacuum electron devices which are used in hundreds of critical commercial and military applications. The acquisition is a significant step in our strategy of developing a one-stop shopping approach for RF microwave products.”
Comtech stated the acquisition would almost triple the size of its RF microwave amplifier segment and is anticipated to generate over US$50m of EBITDA on an annual basis. Comtech expects the merger to be to be accretive in the first year of the acquisition and significantly accretive in the second year, when net synergies are estimated to range from US$5m to US$7m.
The company also pointed to the synergies that could be gained by combining manufacturing, engineering and sales teams for Comtech’s XICOM branded-product group with CPI’s Satcom product group.
Moreover, Comtech cites the fact that because approximately 40% of CPI’s 2009 sales were derived from annuity-like sales for replacements, spares and repairs and that these sales have strong related cash flows, the acquisition will allow it to become a more stable, predictable business that is partially insulated from dramatic shifts in market conditions.
The transaction is subject to both regulatory and CPI shareholder approval. To that end, the Cypress Group, which currently own approximately 53% of CPI, has announced its support for the proposed transaction.
Citigroup advised Comtech on the transaction with Skadden, Arps, Slate, Meagher & Flom and Proskauer Rose the company’s legal counsel. CPI is being advised by JP Morgan, while Irell & Manella is its legal adviser. Moelis & Company is acting as financial advisor and Morris, Nichols, Arsht & Tunnell legal adviser to the special committee of the board of directors of CPI.
