Now it's official: the deal for the sale of Gilat Satellite Networks Ltd. (Nasdaq: GILT; TASE: GILT) to US company Comtech Telecommunications Corp. (Nasdaq: CMTL) has finally been cancelled. Just before the opening of legal proceedings, the companies reached agreement on cancellation of the deal and compensation of $70 million to be paid by Comtech to Gilat. This deal thus joins other merger and acquisition deals that have been cancelled because of the coronavirus pandemic. This is the second time that a deal for the acquisition of Gilat has broken down, twelve years after the first.
Gilat provides satellite communications solutions, while Comtech deals in advanced communications solutions with civilian and military applications. Under the deal signed in January, Comtech was to have bought Gilat in a cash and share deal that at the time valued Gilat at $577 million.
The coronavirus pandemic subsequently hit the businesses of both companies and led to a plunge in their shares prices, which in turn meant a decline in the value of the deal, because of its share component. It was reported in July that Comtech was trying to get out of the deal, on the grounds that the pandemic had had a material adverse effect on Gilat's results, which was grounds for cancellation.
For its part, Gilat claimed that this was in fact an excuse, and announced that it would sue Comtech for damages in the hundreds of millions of dollars, since the contract between the two companies did not contain a clause providing for compensation or a penalty in the event of cancellation. One reason such a clause was not inserted into the agreement was that GIlat viewed such a provision as an "exit option", and wanted to avoid such a situation.
If the deal were to be closed today, Gilat's value for the purposes of it would be $464 million, which compares with a market cap for the company of $289 million. The gap is thus $175 million, and that is the compensation that Gilat would have demanded from Comtech. There is no certainty, however, that a court of law would accept Gilat's approach. To that must be added another uncertain factor: the Russian regulator, whose delay in approving the deal prevented its completion. Assuming that the regulator would have failed to approve the deal by October 29, it would have been cancelled automatically.
It seems that because of the pandemic's impact on the results of Comtech and GIlat, Comtech encountered difficulty in financing the deal. The expected profits of the two companies could not support the substantial loan that was originally planned. At the same time, Comtech's share price fell by 62% following the reports of the deal (while Gilat's share price fell 48.5%), and Comtech's forecasts were fairly weak, adding to the risk of the deal for Gilat shareholders, who were supposed to receive part of the consideration in Comtech shares.
As far as is known, in talks between the two sides, the possibility was raised of completing the deal at a lower price (as has happened in other deals in this period), but Gilat decided not to accept a lower price but rather to continue as an independent company.
The amount that Gilat will ultimately receive is fairly generous. In merger and acquisition deals, the compensation provided for in the agreement in the event of cancellation is usually 3-4% of the deal price, whereas here the compensation amounts to 15% of the value the deal would have if it were completed today, and 12% of its original value in January. It is estimated that the compensation is more than Gilat has spent on account of the deal (legal fees, consultants, banks and so forth).
In a joint statement, Comtech chairman and CEO Fred Kornberg and Gilat chairman Dov Baharav said, "While we both believed from the outset that the merger of these two great companies was a perfect marriage, the Covid-19 pandemic made the timing of the combination particularly challenging. We concluded that under current conditions, the settlement is the best path forward for both companies and their respective stakeholders."
Gilat's main shareholders are private equity firm FIMI Opportunity Funds, headed by Ishay Davidi, which holds 33.9% of the company, and Mivtach Shamir, headed by Meir Shamir, which holds 9.7%. US-based Renaissance Technologies LLC holds 5.3%, and company chairman Dov Baharav holds 1.9%.
FIMI first invested in Gilat in 2012, and subsequently increased its stake, at an average gross price of $4.3 per share, and a total of $80 million.
In 2008, Gilat signed a deal for its sale to a group of Israeli and US investors led by Meir Shamir - then as now a shareholder in the company. The deal price was $475 million.
Close to the completion date, a dispute broke out between the parties. Gilat claimed that it had met all the conditions for completion, but the buyers would not accept this. Gilat issued an ultimatum, and ultimately announced the cancellation of the deal on the grounds that it had been deliberately breached by the buyers. Following legal proceedings, and about two years after the deal was cancelled, a settlement was signed awarding Gilat $20 million compensation.
Published by Globes, Israel business news - en.globes.co.il - on October 5, 2020
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