Wall Street did not greet the merger announced yesterday between defense company Leonardo DRS and Israeli tactical radar company RADA Electronic Industries Ltd. (TASE: RADA; Nasdaq: RADA) with any great enthusiasm. RADA's share price fell 2.4% on Nasdaq yesterday, after opening with even bigger losses, despite the companies' announcement that the merger reflected a 34% premium on RADA's share price - in other words a market cap of $775 million. RADA is merging with Leonardo DRS in an all share deal, which when completed will give RADA's shareholders a 19.5% stake in Leonardo DRS.
It seems that the market found it difficult to accept the calculations regarding the premium. Leonard DRS is a private company, owned by Italian company Leonard SpA, so there is no share price from which the value of RADA can be unequivocally calculated.
In a conference call held by the companies after the merger announcement. Leonardo DRS CEO Bill Lynn said, "We've been conservative I think in terms of the multiples that we're using, we've used a discount from our peers. We think that even with that it provides RADA shareholders some premium against their current share price. And we think over the longer haul for investors, the expansion of multiples of the combined entity towards peer multiples as we drive that double digit EBITDA growth and get our margins into the mid-teens provides a significant opportunity."
If Leonardo DRS's original plan had been implemented, it would already be trading on the NYSE. The company was founded in the US in 1998 as DRS and between 1981 and 2008 was traded on Wall Street before being acquired by Leonardo (then called Finmeccanica) for $5 billion. In 2021, Leonardo attempted to return to Wall Street by raising $640-700 million at a company valuation of $2.9-3.2 billion. But on the day of the IPO in March 2021 demand was at a lower price than the company was aiming for was received and it decided to postpone the offering. However, Leonardo DRS continued to publish financial reports as if it were publicly traded.
Since then there have been no attempts to hold the offering again and now the merger with RADA, a publicly traded company, makes an IPO superfluous and brings Leonardo onto the market through "the back door" to a Nasdaq listing. With a valuation of $775 million for RADA in the deal, the value of the merged company would reach $4 billion - in other words Leonardo DRS would have a valuation of $3.2 billion, which it had wanted to achieve last year. Leonardo SpA's share price rose on the Italian stock market in response to the report of the merger.
Investment bank Jefferies referred to the fall in RADA's share price, saying, "Although we see value in the transaction, we attribute RADA's sell-off, firstly to variable deal premium tied to DRS value, and secondly the transaction is highly dilutive to RADA's high teens rev growth CAGR. We see this as an opportunity as the market digests the transaction."
In Jefferies estimation, the deal reflects a share price of $15.50 for RADA, compared with $11.40 at close of trade yesterday. Jefferies predicts that the merged company will grow by 6% annually in revenue and 12% in EBITDA, while RADA alone would have presented annual revenue growth of 19% and 27% growth in EBITDA. In Jefferies estimation the all-share merger creates balance sheet flexibility and no need for debt to finance the deal.
Published by Globes, Israel business news - en.globes.co.il - on June 22, 2022.
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