Activist investor Outerbridge Capital Management LLC on Monday, June 14, launched a campaign urging Comtech Telecommunications Corp. (CMTL) to launch a strategic review that would include evaluation of a potential sale.
“Based on publicly available information and our diligence, we believe a robust process to explore strategic alternatives would produce a better outcome for shareholders than the status quo,” Outerbridge chief investment officer Rory Wallace wrote in a letter to Comtech’s board.
The activist argued Comtech had poor governance, “lackluster execution” and “a woeful track record of creating value for public shareholders.”
According to FactSet Research Systems Inc., Comtech shares are up 13% in 2021 and 40% over the past year but are down about 9% over the past three years.
The Melville, N.Y.-based communications company, which manufactures satellite ground stations, has a few overtenured directors that could be targeted on its seven-person board. Directors Ira Kaplan, 85, Robert Paul, 79, and Edwin Kantor, 89, have served for 19, 14 and 20 years, respectively, according to relationship mapping services company BoardEx, a sister company to The Deal.
Outerbridge could launch a director contest at Comtech in the coming months. The deadline to nominate directors is Sept. 9, for a meeting likely to take place in December.
At Comtech, the positives outweigh the negatives, Noble Capital Markets Inc. analyst Joe Gomes said.
He pointed out that, on the negative side, Comtech has had some difficulty during the pandemic, noting that in October the company reached an agreement to cancel a deal it had struck in 2019 to buy Gilat Satellite Networks Ltd. (GILT). As part of the cancelation, Comtech paid Gilat a $70 million fee.
“Gilat’s biggest business was flight connectivity for commercial airlines,” he said. “The failed deal really wasn’t Comtech’s fault, but it probably cost them close to if not more than $100 million including fees.”
In addition, Gomes noted that Comtech also continues to have difficulty with its communications equipment sales in Europe, much of which continues to be locked down. Comtech also provides communications equipment to the military, including in Afghanistan, but the U.S. military’s pullout from the country likely will result in revenue cuts for Comtech, Gomes said.
He added, however, a number of opportunities exist for Comtech that could be “game changers.” Comtech’s most recent quarterly report noted it had signed a contract with an unnamed company for some of its satellite ground station technology. Gomes said Amazon.com Inc. (AMZN) or another large company could be seeking to set up a Low- or Medium-Earth Orbit satellite service with Comtech’s equipment.
“That contract could be worth hundreds of millions of dollars. If any of them hit, it could be a lot,” he said.
Amazon and Space Exploration Technologies Corp. have indicated that they planned to launch large satellite services. Amazon, for example, said last year it plans to add 3,000 satellites into Earth’s orbit.
More reopenings in Europe also could help Comtech’s business.
It might be difficult to find a buyer for all of Comtech, Gomes said, because of its disperse business units. “You would need multiple strategic buyers,” he said.
For example, Comtech’s enhanced 911 call routing business likely would attract a different kind of bidder than its military communications or satellite ground station units.
Gomes suggested that Motorola Solutions Inc. (MSI), Comtech’s biggest competitor for 911 call routing technology, likely would be interested in buying the 911 business. He added, however, that a combination of the two might raise antitrust concerns.
Gomes also said Kratos Defense & Security Solutions Inc. (KTOS), based in San Diego, might be interested in buying Comtech’s military communications and satellite ground station businesses. Kratos provides both defense communications technology and manufactures satellite ground stations.
“Comtech’s satellite ground stations and military communications businesses could be a good fit for Kratos,” he said.
Last year, Outerbridge settled a change-of-control contest the fund had been waging at another target, Barnes & Noble Education Inc. (BNED). As part of that deal, the college bookstore operator agreed to add two of four dissident candidates nominated by Outerbridge, including Lowell Robinson, a turnaround and M&A executive, and Zachary Levenick, a former principal at Taconic Capital Advisors LP.
Outerbridge campaign likely initiated the campaign to help drive a Barnes & Noble Education strategic review launched in late 2019 and possible sale of the business. The company, however, has remained public, and its shares traded up recently, at $9.84 a share.