Comtech’s Gilat Acquisition Creates “Dominant” Cellular Backhaul Entity
Comtech Telecommunications has agreed to acquire Israeli ground segment company Gilat Satellite Networks in a transaction that could produce a “dominant” force in the cellular backhaul market. Comtech announced Wednesday that it reached an agreement with Gilat to acquire the company in a cash and stock transaction for $10.25 per Gilat ordinary share, of which 70% will be paid in cash, and 30% in Comtech common stock, for an enterprise value of approximately $532.5 million.
Comtech said the acquisition will create a world leader with combined pro-forma sales approaching nearly $1.0 billion annually. Other strategic benefits include: expanding its portfolio with complementary technologies such as Gilat’s high-performance TDMA-based satellite modems and its next generation solid-state amplifiers; and bolstering its position in the In-Flight Connectivity (IFC) and cellular backhaul markets.
Northern Sky Research senior analyst Lluc Palerm-Serra said this acquisition significantly strengthens Comtech’s presence in the cellular backhaul vertical. “Comtech and Gilat, together, own 80% of the market share in cellular backhaul space,” he said. “So in those kinds of applications, the combined entity will be very dominant.”
Palerm-Serra also called the acquisition “complementary” for Comtech, which is dominant in the high end backhaul for use cases like cruise ships. Gilat, he said, was eroding some of Comtech’s market share on the lower end of the market like IFC, where there was more growth.
Michael Porcelain, Comtech’s newly appointed President, seemed to echo Palerm-Serra’s assessment, calling the acquisition a “perfect match.” During a Wednesday announcement webcast, Porcelain explained the growth factors that drove his decision to make a move on Gilat.
“The satellite industry is undergoing many changes. There is an accelerating growth in the supply of low-cost bandwidth,” Porcelain said. “Like any technology, the lower the cost, the more people can afford to use it. And in this case, we believe they will. This growth and demand dynamic provides the foundation for new applications such as In-Flight Connectivity, satellite wireless backhaul over 5G, and new [Command, Control, Communications, Computers (C4) Intelligence, Surveillance and Reconnaissance (ISR)] C4ISR applications for the U.S. government and other military commands around the world.”
He said that specifically, acquiring Gilat gives Comtech a leading position in the IFC market, citing Gilat’s end-to-end solutions and its relationships with customers such as Go-Go, Honeywell, and Global Eagle. He also mentioned Gilat allows Comtech to meet the needs backhaul needs of mobile operators who are adopting Low-Earth Orbit (LEO) and Medium-Earth Orbit (MEO) technologies.
Comtech announced Porcelain’s promotion on the same day as the Gilat acquisition. Porcelain, who has been with the company since 2002, will assume the role of President in addition to his duties as Senior Vice President and COO. Comtech CEO and Chairman Fred Kornberg said that Porcelain has been a “key driver” of Comtech’s business strategies since his appointment to COO in October 2018.
Gilat Chairman of the Board Dove Varra joined Porcelain for the webcast, calling the acquisition a “win-win for everyone” and adding that both companies share aligned views of the future. He specifically cited that Comtech’s U.S. Department of Defense (DoD) customers, including the U.S. Army, Marines and Navy, will benefit from access Gilat’s portfolio of modems, amplifier and communication On-The-Move antennas.
“There is great opportunity ahead of Comtech and Gilat and all of our stakeholders,” Varra said. “Comtech’s intent to leverage Gilat’s success and achievement over the past several years in the satellite communication industry, including leadership position in the in-flight connectivity and cellular backhaul. This will propel the combined companies to new levels of growth.”
Comtech said it expects both companies’ workforces to remain in place to support all existing products, services, and agreements, and no Comtech or Gilat facility locations are expected to be closed. Gilat’s headquarters is in Petah Tikva, Israel, and Comtech’s headquarters in Melville, New York.
Palerm-Serra said that it makes sense for Gilat to keep its brand, saying that it has strong branding in the satellite industry for modems and antennas.
This is Comtech’s second ground segment acquisition in a few months. In November, Comtech entered into an agreement to acquire UHP Networks, a Canadian provider of satellite ground station technology solutions, for a purchase price of approximately $40 million.
Palerm-Serra said that Comtech is demonstrating as similar line of thinking with both the Gilat and UHP acquisitions, and that it will be interesting to see how Comtech uses the technologies from each of the three entities.
The transaction is expected to close late in Comtech’s fiscal year 2020 or the first part of its fiscal 2021. After the transaction closes, Gilat will become a wholly owned subsidiary of Comtech and will maintain brand. Gilat will remain under the leadership of Yona Ovadia, Gilat’s CEO and Adi Sfadia, Gilat’s CFO. Sfadia will also assume the role of Gilat’s Chief Integration Officer. Gilat’s shareholders will own approximately 16.1% of the combined company upon completion of the transaction. And Gilat’s directors, executive officers and certain significant shareholders holding approximately 45% of Gilat’s issued and outstanding shares have entered into voting agreements to which they have agreed to vote in favor of the transaction.
Separately on Wednesday, investor rights law firm Halper Sadeh announced an investigation into whether Gilat and its board of directors violated the federal securities laws or breached their fiduciary duties to shareholders by not obtaining the best possible price for Gilat shareholders; determining whether Comtech is underpaying for Gilat; and/or disclosing all information necessary for Gilat shareholders to assess the merger. Halper Sadeh did not respond to Via Satellite‘s request to comment.