Following news that its merger with Polycom isn’t going to happen, Cormark analyst Richard Tse thinks there is a little less upside in Mitel Networks (Mitel Networks Stock Quote, Chart, News: TSX:MNW, Nasdaq:MITL).
Last Friday, Mitel announced it had received notice from Polycom of a better proposal from a third party, a development that invoked a matching right period under Mitel’s existing merger agreement with Polycom, terminating the arrangement the pair had to merge and triggering a $60-million termination fee for Mitel.
In April, Mitel announced it had entered into a definitive merger agreement in which it will acquire all of the outstanding shares of the San Jose-based video conferencing and workforce collaboration company for approximately $1.96-billion.
“Mitel shareholders, customers and employees know that we follow a rigorous and disciplined approach to mergers and acquisitions,” said CEO Rich McBee. “The agreement announced on April 15 resulted from a detailed due-diligence and negotiation process that we feel accurately determined fair value for Polycom. We feel it would not be in the best interest of Mitel shareholders to adjust the existing agreement. While I am disappointed that this particular transaction will not move forward, I am confident in Mitel’s future as an industry leader and as a market consolidator. I wish our colleagues at Polycom, with whom we have worked closely for the past several months, ongoing success in the future.”
Tse says it is back to the drawing board for Mitel.
“After a contentious bid for Polycom, Mitel terminated its bid last week in light of a superior proposal from a third party widely reported to be Siris Capital,” notes the analyst. “With Mitel waiving its matching rights, Polycom will be terminating its merger agreement with Mitel and will pay Mitel a $60 MM termination. In the short term, we believe MITL/MNW will likely mark time after what we believe to be a short covering rally as investors digest all that’s happened as the story reverts to the existing businesses which are made up of legacy and growth products. Despite that, our investment rating is unchanged. We continue to believe the stock price undervalues the sum-of-the-parts valuation (despite the short covering rally) when it comes to Mitel’s premise (legacy), cloud (growth) and mobile (growth) businesses. That said, we’ve revised our sum-of-the-parts valuation to reflect some conservatism. As a result, our blended EV/S multiple goes from 2.1x to 1.6x EV/S.”
In a research update to clients today, Tse maintained his “Buy” rating but lowered his one-year price target on MITL from (U.S.) $16.00 to $10.50.