There are some takeovers that leave everyone scratching their heads because no one can quite figure out the rationale. And then there are some, like MacDonald Dettwiler's $875-million (U.S.) acquisition of Loral Space & Communications' satellite manufacturing subsidiary, that are explained so clearly.
This deal, MDA's first big transaction since selling its property data unit, is about two things: access to the U.S. market, and ramping up commercial communications.
Historically, MDA hasn't gained much traction on U.S. mega contracts. "When the big programs go forward, we get sent home," said chief executive officer Dan Friedmann on a conference call Wednesday. Acquiring SSL should change that. Based in Palo Alto, the company is well placed for access.
On the commercial front, the deal re-works MDA's income statement. Currently, its surveillance and intelligence unit is the biggest revenue generator, accounting for half of the money brought in. After the deal, commercial communications -- mainly satellites that do things like stream video to handheld devices and enable digital audio radio -- will make up two-thirds of MDA's revenues, dwarfing surveillance and intelligence as well as 'advanced technology.'
As of right now, MDA has gotten by just fine with its current business mix, having beaten earnings expectations for nine straight quarters. But there was some chatter and confusion around what would drive the company in the future. This deal addresses that head on.
Plus, management says communications was its fastest growing division, so the transaction simply builds on this.
But make no mistake, its quite the deal. MDA's revenues will more than double from $761-million in 2011 to $1.9-billion, and operating EBITDA jumps from $194-million to $345-million.
To get the business, MDA is paying $845-million in cash. The valuation is a bit tricky, however, because there are a few moving parts.
SSL's traditional business is valued at $550-million, but MDA will also be able to amortize a substantial portion of purchase price over a 15 year period, providing a quasi-tax shield worth $120-million. MDA is also acquiring the target's Palo Alto real estate, valued at $101-million, but must also assume its pension liabilities, worth $132-million.
Bank of America Merrill Lynch acted as lead financial adviser, with help from RBC Dominion Securities.