Mitel’s rollercoaster ride will continue, says Cormark

The ups and downs experienced since Mitel (Mitel Stock Quote, Chart, News: TSX:MNW, Nasdaq:MITL) announced the acquisition of Mavenir will continue, but the acquisition has the potential for “big upside”, says Cormark analyst Richard Tse.

On March 2, Mitel announced that it would acquire U.S-based 4G LTE player Mavenir (Nasdaq:MVNR) in a stock and cash deal worth about $560-million.

Mitel CEO Rich McBee talked about the reasoning behind the deal.

“Mitel is a leader in enterprise and cloud communications, markets in which mobility is becoming increasingly influential. With wireless adoption of IP and 4G LTE and demand for next gen mobile services ramping quickly, we see a compelling opportunity to capitalize on a major market transition to add a high-growth mobile business to Mitel,” he said. “We believe the combination of Mitel and Mavenir creates a powerful new value proposition for enterprises and mobile service providers, using a common IP technology layer as the foundation for convergence, growth and competitive differentiation.”

Shares of Mitel rose following the Mavenir pickup, but have since given back much of those gains. Tse says suspicion of the deal’s merits is a rational reaction.

“Ever since Mitel’s announced acquisition of Mavenir on March 2, there’s been skepticism for this transaction. Rightly so, even we’ve had a tough time digesting the rationale for acquiring Mavenir as its operating business is somewhat incongruent to what we had been expecting when it comes to the market(s) Mitel is looking to consolidate. No doubt, we believe it has also increased the risk profile for MWN/MITL. Yet, when we reflect on what Mavenir brings to the table, the upside potential is meaningful which explains why we rate MWN/MITL a Buy even with Mavenir’s negative Q1 preannouncement last week.”

Tse says his impression of Mavenir’s management team is that it is a technically savvy group that could benefit from better operational discipline, which he believes McBee and the Mitel team can provide. He thinks the company’s opportunity in the nascent “voice over LTE” space is real, pointing to early customer wins such as AT&T, Vodafone, and T-Mobile.

In a research update to clients this morning, Tse maintained his “Buy” rating and (U.S.) $16.00 one-year target price on MNW.

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