Cormark: Why Mitel’s move to acquire ShoreTel is a good sign

Mitel’s (Mitel Stock Quote, Chart, News: TSX:MNW, Nasdaq:MITL) aggressive move to acquire a competitor is a signal that the integration of Aastra is going well, says Cormark analyst Richard Tse.

This morning, Mitel announced it has made a proposal to the board of ShoreTel (ShoreTel Stock Quote, Chart, News: Nasdaq:SHOR) to acquire all its outstanding shares for $8.10 per share in cash, or about $540-million. The offer is a 24% premium to ShoreTel’s closing stock price on Oct. 17th. The company was rebuffed in a letter it sent to ShoreTel’s board on October 2nd.

“The business communications market is rapidly consolidating and Mitel has clearly stated that we intend to be a consolidator in this market. We see a compelling opportunity to bring together two market innovators with strong and complementary market footprints, particularly in the United States, where ShoreTel does more than 90 per cent of its business, in a way that delivers significant value and opportunities to the shareholders, customers and employees of both companies,” said CEO Rich McBee. “We are disappointed that the ShoreTel board has rejected our proposal and refused to engage with us. Mitel continues to believe that the proposal offers ShoreTel shareholders an attractive premium. We remain open to constructive and progressive discussions and for that reason I have advised the ShoreTel board that our proposal will remain open until 5 p.m. ET on Nov. 20, 2014.”

Tse says he sees Mitel’s move to acquire ShoreTel as a positive for two reasons. First, he thinks its signals that the massive integration of Aastra is going well. Second, he believes the company’s move to consolidate a mature market can create cost synergies. He thinks the ShoreTel pickup could add more than $0.20 to Mitel’s EPS in Fiscal 2015.

“In our travels, we’d note that the big concern of investors has been with the confidence in Mitel’s ability to surface $75MM in synergies,” says Tse. “No doubt, the move to acquire ShoreTel should signal the contrary. And with an eye for acquisitions, we see meaningful upside to this stock looking ahead.”

In a research update to clients this morning, Tse reiterated his “Top Pick” rating and $16.00 one-year target on Mitel.

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