National Bank upgrades Mitel on ShoreTel acquisition

National Bank Financial analyst Richard Tse thinks a new acquisition puts Mitel (Mitel Stock Quote, Chart, News: TSX:MNW, Nasdaq:MITL) firmly back on track.

This morning, Mitel announced it would acquire California-based business communications player ShoreTel for $7.50 a share, or $530-million. Mitel said the combined entity would be global market leader in the rapidly growing UCaaS (unified communications as a service) market.

“This is a very natural combination that enables us to continue to consolidate the industry and take advantage of cost synergy opportunities while adding new technologies and significant cloud growth to our business,” said Mitel CEO Rich McBee. “Together, Mitel and ShoreTel will be able to take customers to the cloud faster with full-featured, cloud-based communications and applications.”

Tse says this is a clear step in the right direction.

“After what’s widely viewed as a misstep with Mavenir, Mitel moved to right the ship by announcing a definitive agreement to acquire ShoreTel at total equity value of US$530 mln (US$7.50) in an all-cash deal financed with debt,” explains the analyst. “To us, the transaction is not entirely surprising as we highlighted the potential for this acquisition in our initiation of coverage report titled DÉJÀ VU last fall. Strategically, we believe this acquisition is positive and arguably needed more now than ever given what we believe to be an accelerating decline in Mitel’s legacy premise business. In our view, that thesis was corroborated by Mitel’s Q2 results that were also reported today.”

Mitel’s second quarter, reported this morning, saw the company lose (U.S.) $100,000 on revenue of $238.6-million.

“Perhaps an afterthought in the midst of this acquisition but the Q2 results were also reported,” Tse notes. “As for the results, they were slightly below estimates with Q3 guidance range in line with our and consensus estimates.”

In a research update to clients today, Tse upgraded Mitel from “Sector Perform” to “Outperform” and raised his one-year price target on the stock from (U.S.) $7.50 to $10.00, implying a return of 29 per cent at the time of publication.

Tse thinks Mitel will generate EBITDA of (U.S.) $118.6-million on revenue of $946.8-million on fiscal 2017. He expects those numbers will be EBITDA of $132.9-million on a topline of $933.3-million the following year.

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