With Aastra acquisition done, Cormark’s Tse upgrades Mitel to Top Pick

Mitel CEO Rich Mcbee. Cormark analyst Richard Tse says the market has been pricing both Mitel and Aastra as legacy plays for a number of years and has ignored their considerable moves to the cloud.Cormark analyst Richard Tse says the potential synergies presented by Mitel (TSX:MNW) on its acquisition of Aastra Technologies seem conservative to him. The upside he sees has prompted him to rerate the stock as a “Top Pick”.

Last Friday, Mitel announced it had completed the acquisition of peer Aastra for approximately $392-million. Concord, Ontario-based Aastra markets a range of telephony solutions for large businesses, and had, in recent years, been hit by a slowdown in Europe, where approximately 80% of its revenue comes from.

Mitel CEO Rich Mcbee says the sheer size of the pickup creates opportunities.

“With this merger the combined annual revenue of Mitel exceeds $1-billion, which we believe creates the financial scale and operational leverage to drive shareholder value and profitable growth in an opportunity-rich consolidating market,” he said. “We now have double the talent, tools and range of solutions to aggressively compete for a greater share of our market.”

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Mitel says it expects approximately (U.S.) $50-million of run rate synergies within two-and-a-half years, Tse does not pinpoint a figure believes this estimate is too low.

Tse says the market has been pricing both Mitel and Aastra as legacy plays for a number of years and ignored their considerable moves to the cloud. He says enterprise communications platforms are quickly moving from on-premise to virtualized solutions and the combined entity of Mitel and Aastra, with more than 60-million potential customers, has a lot of runway to capitalize on this trend.

The Cormark analyst says he sees Mitel’s EBITDA moving from $85-million in fiscal 2013 to $146-million in 2014 and and $200-million in F2015. In a research update to clients Monday, Tse maintained his $12.50 one-year target on Mitel, but upgraded the stock to TOP PICK from BUY.

At press time, shares of Mitel on the TSX were up 3.5% to $9.79.

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