Honeywell acquisition is no slam dunk for Com Dev shareholders, says Paradigm

The acquisition of Com Dev by Honeywell isn’t a slam dunk for the Canadian company’s shareholders, but it does have potential upside for them, says Paradigm Capital analyst Daniel Kim.

Yesterday, Com Dev (Com Dev Stock Quote, Chart, News: TSX:CDV) announced it would sell itself to Honeywell International for a cash consideration of up to $5.25 per common share, representing an enterprise value of approximately $455-million. Investors will get the cash plus 0.1977 of a share of Com Dev data services subsidiary exactEarth, for an aggregate implied transaction value of up to $6.54 for each Com Dev share. The Cambridge-based company also announced that exactEarth will be spun out as a publicly traded company.

“Com Dev is a terrific fit for Honeywell, growing our existing space and connectivity businesses, and expanding our global reach to new international customers,” said Tim Mahoney, president and chief executive officer of Honeywell Aerospace. “Com Dev’s differentiated technologies and strong position in the growing connectivity industry make the company an attractive addition to our business. We are equally excited about what we can bring to Com Dev, specifically our broad product portfolio, deep industry expertise and relationships, global sales force and brand, and our proven Honeywell operating system. We are confident that all of our key processes and initiatives will be immediate differentiators for Com Dev.”

Kim says that the takeout price infers a $125-million valuation for exactEarth, which he notes is far below the previously floated IPO range of $157 to $187-million price. The analyst says he pegs a much higher value for it, and thinks investors are receiving an option on an asset that has “huge” potential. Overall, Kim has a mixed view on the deal, but says he is inclined to support it.

“This take-out offer is not a slam dunk for investors,” says Kim. “The cash component is below yesterday’s closing price. However, taking all things into consideration, balanced with management’s commentary on the conference call that this bid represents a value greater than any scenario calculated against the company’s five-year plan, we are on balance inclined to tender to this bid and hold an option on exactEarth. We had previously carried a target valuation on exactEarth a multiple higher than this inferred valuation. Therefore, assuming the stock does not trade up to the C$6.54 full transaction value, we would be buyers below this level.”

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