US satcoms equipment maker Comtech Telecommunications has bought secure communications specialist TeleCommunication Systems in a US$430.8m deal. The acquisition helps diversify Comtech’s business, creates synergies, and establishes it as a prime contractor on several US government contracts.
US satcoms equipment maker Comtech Telecommunications (NASDAQ:CMTL) has bought secure communications specialist TeleCommunication Systems (NASDAQ:TSYS) in a US$430.8m deal.
The acquisition sees Comtech enter new commercial businesses such as the public safety market in the US, where TCS is developing next generation emergency 911 systems.
They said the combined group would employ about 2,000 people, and generate US$671.4m in sales and US$92.2m in adjusted EBITDA without synergies, which are expected to be roughly US$12m in the second year after closing.
Stanton Sloane, Comtech’s CEO, said: “TCS is a unique business and a leading provider of mission-critical [command, control, communications, computers, intelligence, surveillance and reconnaissance] solutions and next generation emergency 911 services to leading cellular and VoIP providers.
“The acquisition is a significant step in our strategy of entering complementary markets and expanding our domestic and international commercial offerings.”
Comtech has been integrating subsidiaries and making a series of management changes recently, as part of a restructuring process that came after it pulled a potential sale at the end of 2014.
It had hired Citigroup in August 2014 to review strategic alternatives as its business shifted away from the US government, following the loss of a significant military contract in 2010. Annual revenue declined 17% on average from FY11-14.
However, the group’s board decided in December 2014 that remaining independent would be best for shareholders, and it set out a plan to expand its product portfolio, pursue acquisitions of businesses and technologies, and return cash to shareholders.
TCS will help diversify Comtech’s earnings, while establishing it as a prime contractor on several US government contracts, including for over-the-horizon ‘troposcatter’ microwave systems products.
Citigroup is Comtech’s adviser for the TCS deal. The bank has also provided a US$400m loan commitment to help fund it. About US$149.9m of the US$202.6m of the companies’ combined cash, cash equivalents and marketable securities will also be used.
The merger deal is approved by both boards and will see Comtech make a first step cash offer of US$5 per TCS share, a premium of 28.6% compared with their volume-weighted average price over the last 90 trading days. All of TCS’s anticipated US$143.6m in debt will then be repaid upon closing the transaction, expected no later than March.
The deal is subject to regulatory approvals and the tender of a majority vote of TCS outstanding common stock. The US$430.8m equity value represents an implied transaction multiple of about 8.9x, based on TCS’ adjusted EBITDA for the last 12 months, plus approximately US$8m of first year synergies.
At the time of close, they expect the combined company will have a total leverage of about 3.9x trailing twelve months pro forma adjusted EBITDA. Combined cash flows will help decrease this over time, and the credit facility will permit Comtech to issue new shares to reduce total leverage prior to or after the close. It will also allow Comtech to maintain its US$1.20 per share annual targeted dividend rate.
Significant TCS stockholders Maurice Tosé, its CEO and chairman, and Jon Kutler, founder of Admiralty Partners and a director of TCS, have already agreed to tender their shares.
TCS is being advised by Lazard, which was brought in earlier this year to explore strategic alternatives following pressure from hedge fund Becker Drapkin Management, one if its largest shareholders, to make board changes as TCS’ revenues suffered amid the decline in government spending.
Commenting on the sale to Comtech, Tosé: “The TCS board of directors and management believe this strategic combination with Comtech is compelling and provides significant benefits for our stockholders, customers and employees. Our customers will benefit from greater resources and more diverse product offerings, and our employees will benefit from being part of a larger more diversified company.”
Comtech made a failed US$473m bid in 2010 to buy rival communications products developer CPI International, which was eventually sold to private equity firm Veritas Capital. Shareholder criticism about Comtech’s strategic direction following that move prompted it in 2011 to launch a separate strategic review, resulting in an increased dividend and share buyback to assuage the discontent.
Proskauer Rose is legally advising Comtech on its latest deal, and TCS hired Bryan Cave for legal advice.
