The surprise divestiture of its mobile division, Mavenir, will take a while to digest but National Bank Financial analyst Richard Tse thinks Mitel (TSX:MNW, Nasdaq:MITL) will emerge stronger.
On December 19, Mitel announced it would sell its mobile business to the parent company of Xura Inc.
“In a period of rapid change and massive technology transitions, scale and focus are key to driving growth and shareholder return. This transaction will allow Mitel to achieve these goals,” said CEO Rich McBee “It also enables us to intensify our focus and capital in expanding our leadership position in the enterprise market as it prepares for large-scale digital transformation of premise-based systems to the cloud. Employees and customers of the mobile division will benefit by being part of a large carrier-focused company with the size, scale and support infrastructure needed to truly compete for and drive the next wave of 4G/5G innovation.”
Tse says he was initially surprised by the move, but after meeting with Mitel management he says he now understands that a changing competitive landscape means that Mavenir would have likely required a large capital investment. In that light, he thinks a shift back to its core simplifies Mitel’s business.
“We had the opportunity to meet Mitel Management today following last month’s surprise announcement that the Company would be divesting its Mobile division (Mavenir) for ~$385 mln plus equity interest in a new venture with potential upside up to $125 mln,” says Tse. “As highlighted in our Dec. 20th note, we were surprised by the divestiture in light of the heady progress with Mavenir since acquiring it back in April 2015. No doubt, that was the focus of our meetings particularly given the $560 mln paid by Mitel. For us, it raised some questions around the diligence related to Mavenir. With respect to that question, we believe management provided a reasonable explanation in our meetings as to the change in strategy. That said, we think it will likely require a few quarters of execution under its former strategy before we see a meaningful re-rating in the name. Despite that and the overhang of the bad optics, we continue to believe the name is undervalued.”
In a research update to clients today, Tse maintained his “Outperform” rating and one-year price target of (US) $10.00 on Mitel, implying a return of 42 per cent, including dividend, at the time of publication.
Tse thinks Mitel will generate EBITDA of $158.7-million on revenue of $1.18-billion in fiscal 2016. He expects these numbers will improve to EBITDA of $174.1-million on a topline of $1.19-billion the following year.