"In five years time we'll be a company with several hundred million dollars sales a year, and even then we'll still be in the middle of the growth process," says Ilan Kenig, the Israeli CEO of Canadian wireless systems developer Unity Wireless Corp. (OTC BB: UTYW.OB). The company, which produces and supplies wireless telecommunications infrastructure solutions for equipment manufacturers and cellular service providers. Although it is a jointly owned US-Canadian company, in recent years its Israeli connection has grown, and not just because of Kenig. In 2006, Unity Wireless acquired three Israeli wireless technology start-ups: Avantry, Celerica, and Celletra. 40 of its 85 employees are now based in Israel.
The three acquisitions were made in shares, and they were viewed by the market as unsuccessful exits. Each of the three companies had received tens of millions of dollars in investment and they were acquired by Unity for just a few million dollars. "It's not case of an unsuccessful exit, but a process of consolidating forces, and continuing development," claims Kenig. "That's how the venture capital funds which invested in the companies viewed the process. It was more of a merger than an acquisition."
Following the merger, more than 50% of Unity is now held by venture capital funds, of which Star Ventures is the largest shareholder with 17%.
Unity, which was founded in 1993, developed a technology in collaboration with the University of British Columbia. The technology is at the core of the cellular system and the company sells it to base station manufacturers, among them giants such as Alcatel-Lucent. "It took the company a long time to build up confidence on the market," says Kenig. "It's like a heart surgeon who has just graduated from university, you don't want someone like him operating on you. The big manufacturers have to rely on our product, which is meant to work continuously at stations in remote regions. The company which opened the door for us was the Chinese company ZTE Corporation, a company which competes with Alcatel-Lucent (NYSE: ALU) and Nortel Networks (NYSE; TSX: NT), and it was the one that gave us our break in 2000."
Through its acquisitions in Israel, Unity added three more segments in the wireless market to the original technology. Kenig explains: "Avantry produces point-to-point connectivity solutions; Celerica makes optical connectivity products that enhance coverage, and remote transmissions, and Celletra produces Repeaters, small communications systems that boost the signal in areas where there's no reception, thereby saving the construction of base stations." In essence, Kenig says, Unity now provides a full solution containing all the components. "Antennae is the one area that we haven't covered, and we looking at whether there would be any logic in us entering this field. If we do we will cover the entire wireless market. There are a lot of extremely interesting companies in this field in Israel."
The market that Unity operates in has seen a welter of mergers in recent years, and its own merger with the three Israeli companies was part of this trend. "I'm a big believer in mergers," says Kenig. "Instead of everyone developing a niche and thinking that he's the best, let's develop a platform, and create one large force. The mergers would not necessarily have gone ahead had we not been a Canadian company, and the fact is that there was no merger between any of the companies before this, even though some of the funds were invested in more than one of three. There's a lot of ego in Israel and not enough openness and maturity, and it hurts me to see this. With all the Israeli capabilities and know-how, we could have created an Israeli Nortel."
The mergers created what Kenig describes as the "new Unity". The company's market is worth around $3.4 billion, but Unity is still not a large company, with revenue of $14.6 million for 2006. Kenig feels that the big breakthrough is in the offing. "We're sufficiently stable, we've started big projects, and I am looking forward not to linear but very rapid growth," he says. The company's forecast for 2007 is for revenue to come in at $25-30 million, with Unity reaching operating break-even in the first half of year, and profitability for the full year. "The market is huge. We're taking a small chunk that reflects large projects to come. The moment a customer chooses our solution, we enter his system and progress together with him."
Kenig notes that the company has been conservative in its guidance, and it does not take into account the likelihood that one of the projects could get "an extremely strong boost commercially." One such option could be with Flarion Technologies, which was acquired by Qualcomm Inc. (Nasdaq: QCOM). Sprint Nextel Corp (NYSE: S) put out a massive tender for the roll-out of WiMAX across the US, and Qualcomm is bidding against a consortium led by Intel Corporation (Nasdaq: INTC). "The battle is now on," says Kenig. "Qualcomm has a full solution, of which ours is a part." If Qualcomm wins the tender, Unity will also be affected. Kenig says that Unity also collaborates with Qualcomm in a market known as the "Business Continuity market." When hurricane Katrina caused the collapse of telecommunications systems across Louisiana, Unity supplied Qualcomm with small systems designed to replace base stations that had been hit by the storm. "Every night they sent over an aircraft to collect the systems we built the day before, and installed them on the ground," says Kenig.
The mergers in the market have left Unity with two large rivals: Powerwave Technologies Inc. (Nasdaq: PWAV), which has a market cap of $675 million; and Andrew Corp. (Nasdaq: ANDW), which has a market cap of $1.6 billion. The slightly smaller Unity has a market cap on the Bulletin Board of $40 million. "A company in our field cannot remain small," says Kenig. Does this mean that Unity itself could be an acquisition target? "We've had offers before, and the board turned them down. At the moment we're rapidly building up value. I don't know how the shareholders will decide if there are better offers. It's an option that might happen." As it happens, the company has a number of Israelis on its board, some of them representatives of the venture capital funds that invested in the companies that Unity acquired.
In the meantime, Kenig believes that the company's stock is undervalued. "We still haven't yet reached a critical mass on the market, because we haven't been given the right valuation by the market, which was surprised by our acquisitions. I believe that the value will grow commensurate with the volume of activity and projects. The stock is undervalued and does not reflect what's happening."
In addition to its big rivals, Unity also faces competition from companies that supply part of the wireless solution, two of which are Israeli. One of them is Koor Industries Ltd. (NYSE: KOR; TASE: KOR) subsidiary Dekolink Wireless Ltd., which produces repeaters. Koor's parent IDB Holding Corp. Ltd. (TASE:IDBH) also has holdings in Unity, and Kenig says there have been "feelers," about a merger between the two companies.
Another competitor in point-to-point connectivity solutions is wireless backhaul solutions company Ceragon Networks Ltd. (Nasdaq: CRNT; TASE:CRNT). "Ceragon has reached a good level of sales, but I believe that it has already touched the ceiling," says Kenig. "It has all but maximized the available market in its line of business."
Unity is collaborating with Alvarion Ltd. (Nasdaq: ALVR; TASE: ALVR) under the auspices of the Chief Scientist's MAGNET Generic Pre-Competitive Technologies and R&D program. Kenig also believes, with regard to the Sprint Nextel WiMAX tender, that "Alvarion is building on receiving a share in the tender from the Intel-led consortium."
And what does the future hold for Unity? Kenig is optimistic. The company recently raised $4 million from a group of Israeli investors led by Meitav Group. This year it plans to "move up a level" and apply for a listing on Nasdaq, and it may also list for trading on the Tel Aviv Stock Exchange (TASE) in the future. For now, Unity is aiming to increase its exposure to potential investors in the US, Canada, and Israel, and although its stock is traded on the Bulletin Board, its level of liquidity is not low. Kenig explains, "A lot of investors see great potential in us. There is now a trend towards investment in small companies with potential, since these can delivery a high rate of return for investors." Kenig believes that Unity will do just that.
Published by Globes [online], Israel business news - www.globes.co.il - on March 28, 2007
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