With sale of company, Maxar is back to square one: National Bank Financial

Debt. Debt. Debt.

The proposed sale of Maxar Technologies to a group of private investors is a “strong positive” when it comes to the company’s biggest problem, which is it oft-crippling debt load.

On Monday, Maxar announced it had entered into a definitive agreement that would see it sell to Northern Private Capital (NPC) for $1-billion ($765-million (U.S.).

“The sale of MDA furthers execution on the company’s near-term priority of reducing debt and leverage,” CEO Dan Jablonsky said. “It also provides increased flexibility, range and focus to take advantage of substantial growth opportunities across Earth intelligence and space infrastructure categories. After the transaction is complete, Maxar will retain leading capabilities in geospatial data and analytics, satellites, space robotics, and space infrastructure, and we will continue to have strong alignment with our defence and intelligence customers, the evolving requirements of civil governments, and the pursuit of innovation seen in the commercial marketplace. We thank the talented employees of MDA, who have built a world-class business with unique capabilities, and we look forward to working with them as a commercial partner and component supplier to Maxar going forward.”

Tse says this move has Maxar going back to square one.

“It was a little over two years ago when MDA completed its acquisition of DigitalGlobe to begin its Maxar journey. Over that 2+ year period – we’ve seen extremes from the potential for great promise for the stock and to points of despair given what was perceived to be a debilitating debt load. Yesterday, Maxar essentially concluded a strategic round trip (with the exception of SSL) by entering into a definitive agreement to sell MDA to a consortium of financial sponsors led by Northern Private Capital (NPC), for CAD$1 bln (US$765 mln), subject to adjustments and regulatory approvals. The transaction will include all of MDA’s Canadian businesses, encompassing ground stations, radar
satellite products, robotics, defense and satellite components, and approximately 1,900 employees. According to the Company, those collective businesses are expected to generate approximately US$370 mln and US$85 mln in revenue and Adjusted EBITDA, respectively, in 2019. (including intercompany revenue of US$78 mln to other Maxar entities). In terms of valuation, the transaction is reasonably valued at EV/S of ~2.0x and EV/EBITDA of 9.0x. We would note that our estimated value of MDA (ex SSL) on October 5, 2017 (date of announced closing of DigitalGlobe) was approximately $1.1 bln. Not surprisingly, Maxar expects to use proceeds to reduce leverage and for potential investments for growth in its core areas of Earth Intelligence and Space Infrastructure. There’s no doubt that reducing leverage lowers the
financial risk which in turn drives a positive valuation re-rating which has us increasing our target price to $16 based on a lowered discount rate. Yet, the promise of synergies touted by the former merger definitely raises questions in regards to the strategic decision making by the Company.

In a research update to clients today, Tse maintained his “Sector Perform” rating but raised his one-year price target on Maxar from (US) $12.50 to (US) $16.00, implying a return of negative three per cent at the time of publication. The analyst thinks Maxar will post EBITDA of (US) $517-million on revenue of $1.93-billion in fiscal 2019. He expects those numbers will improve to EBITDA of $535-million on a topline of $1.97-billion the following year.

“There’s not doubt, the sale of MDA is a strong positive to offsetting the debt load, the main drag on the valuation,” Tse added. “Yet, from an operating perspective, Maxar is selling a very profitable segment, unlike SSL. In addition, Maxar’s Worldview Legion program is still 2+ years out. Bottom line, while we give a valuation re-rating benefit from the reduced leverage, the current valuation reasonably reflects the risk-to-reward profile under the sale. We maintain our Sector Perform rating with a revised target of US$16.00 (was US$12.50) care of the reduced credit risk which reflects a lowered discount rate in our DCF. Our target implies 7.8x EV/EBITDA on our F2019 estimates (was 7.4x).”