[Satellite TODAY 09-09-10] Comtech Telecommunications cancelled its $472.3 million merger agreement with RF microwave manufacturer CPI International after unanimous board approval at both companies, Comtech announced Sept. 7.
The agreement, initially announced in May, would have seen Comtech acquire CPI and repay all of its existing debt upon the closing of the transaction. At the time, Comtech CEO Fred Kornberg said the acquisition would have tripled the size of Comtech’s RF microwave amplifier segment as part of his company’s strategy to developing a one-stop shop for RF microwave products.
As a result of the merger cancellation, CPI paid Comtech a $15 million breakup fee in accordance to the agreement the two companies signed in May.
While neither company would comment on the reasons behind the cancellation, Raymond James Analyst Chris Quilty told Satellite TODAY that Comtech’s loss of the U.S. Army’s Blue Force Tracking 2 (BFT-2) deal in July may have been a factor and that CPI most likely initiated the deal’s termination. “It appears that Comtech was fully committed to the CPI merger, and may have offered some concessions to offset the impaired offer price, but CPI’s board apparently viewed Comtech as ‘damaged goods’ and elected to soldier on as an independent company. It is probably fair to assume that CPI lost interest in the deal following Comtech’s loss of a critical contract (BFT-2) and the subsequent decline in Comtech’s stock price by more than 30 percent.”
However, Quilty said the cancelled merger benefits Comtech more than it hurts the company, pointing to the fact that CPI’s $15 million termination fee gives Comtech a reasonable cash boost, after the company spent less than $1 million on expenses related to the merger.
“Following the breakup, Comtech should emerge with a net cash position of more than $400 million and the ability to generate about $100 million of operating cash – even with the loss of the BFT-2 contract. This strong cash position should leave Comtech well-positioned to pursue alternative M&A opportunities … Investors were decidedly unimpressed with the CPI transaction at the time of its announcement, viewing the deal as both dilutive to earnings and growth. Consequently, the cancellation of the deal will likely be viewed as a positive event by many investors,” said Quilty.
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