Today’s deal is part on ongoing strategy by MDA which began in 2008 after a failed acquisition of MDA by ATK. Since that failed deal, MDA began in earnest to look for U.S. acquisitions.
The first major piece to fall into play was the acquisition in 2012 of SSL. That gave MDA a significant anchor in the U.S. commercial market, with an avenue to get into the large lucrative government segment.
Lance made it known that he was interested in growing the company by actively looking for more acquisitions. Today’s blockbuster deal certainly confirms that his vision for the company is to think big.
Lance said of the acquisition, “today’s announcement creates a new company that will lead the industry, offering space systems and imaging solutions from inception to execution, able to make design decisions with our customer’s needs in mind. This combination has the scale, resources and technology to serve the large and increasingly complex needs of government and commercial customers globally. By combining MDA and DigitalGlobe, we are significantly expanding our total addressable market by broadening both companies’ capabilities and facilitating future growth.”
Lance will lead the combined company.
DigitalGlobe will become a wholly owned subsidiary of MDA under their U.S SSL MDA Holdings company. DigitalGlobe will retain its brand and will remain headquartered in Westminster, Colorado.
Strategically, the deal appears to be good, combining the strengths MDA’s Communications and Surveillance & Intelligence market segments with DigitalGlobe’s High-Resolution Imagery and Data Analytics market segments.
It further diversifies their product base providing predictable imagery and data services revenue, while taking some pressure off the softer satellite manufacturing business segment.
Jeffrey R. Tarr, president and chief executive officer of DigitalGlobe, said, “Following a thorough review of strategic alternatives, we believe that joining forces with MDA will enable us to deliver more value to our customers, expand opportunities for our team members and maximize value for shareowners. This compelling transaction will deliver immediate cash value to shareowners with further upside through ownership in the combined entity, position DigitalGlobe to reach its next phase of growth and provide greater opportunities for our team members by being part of a larger, more diversified company.”
According to MDA “each DigitalGlobe common share will be exchanged for US$17.50 in cash and 0.3132 MDA common shares, representing a per share value of US$17.50 based on MDA’s unaffected closing share price of C$73.40 on the Toronto Stock Exchange (TSX) on February 16, 2017, the day prior to market speculation about a potential combination, and a C$/US$ exchange ratio of 0.7612. The total cash and stock per share value consideration represents an 18% premium based on DigitalGlobe’s unaffected closing stock price on the New York Stock Exchange (NYSE) on February 16, 2017.”
As part of the deal MDA will list its shares on the NYSE in addition to the TSX after the acquisition is completed.
MDA has secured full financing for the deal through the Royal Bank of Canada and the Bank of America Merrill Lynch.
The company also signaled that further reorganization will take place to “ensure that the ultimate parent of DigitalGlobe is incorporated in the U.S. by the end of 2019.” Lance wouldn’t elaborate further on what that the reorganization would entail.
Obstacles to the Deal
The investment community appears had some concerns that the size of deal will leverage the combined company approximately 4.1 times net debt to operating earnings before interest, tax, depreciation and amortization (EBITDA) at closing of the deal. According to Lance, MDA’s traditional leverage is around 2.5. MDA said they expect to have the net leverage down to 3.0 times by 2020.
Regulatory approval is another potential stumbling block. While Lance said they are confident the deal will get regulatory approval in both Canada and the U.S., and have spoken with the U.S. administration, customers and the Canadian government, they still must convince both governments the deal is a good one.
MDA is confident it can close the deal sometime in the second half of this year.
Another hurdle they might have to overcome is a possible shareholder lawsuit. Shortly after the deal was announced, the New York law firm of Levi & Korsinsky, LLP announced that they had “commenced an investigation into the fairness of the sale of DigitalGlobe to MacDonald Dettwiler and Associates.” It should be noted that Levi & Korsinsky is “dedicated to fighting for aggrieved shareholders and consumers, and obtaining redress from those who have harmed them.”
With shareholders getting an 18% premium on the deal, Levi & Korsinsky might not be able to drum up enough support for a lawsuit.
What’s to Become of the Canadian Business Segment
There will no doubt be some Canadians who see the deal as further erosion of a made in Canada success story into a U.S. focused entity.
The reality is that MDA is a public company with limited growth potential in Canada. Yes, the government helped along the way, just as it has many others.
For MDA, the U.S. market, and in particular the U.S. defence market, is just too big to ignore. To grow and succeed in the U.S., MDA had to evolve into what it’s becoming.
In releasing its earning for 2016, MDA broke down its revenue geographically. What it shows is a global company. Canada represented only 27% of revenue in 2016. The U.S. was 29%, Asia 20%, Europe 18%, South America 4% and Australia 2%.
If this deal goes through the Canadian percentage of revenue as a whole will certainly continue its downward trend. However, that doesn’t necessarily mean revenue will be lower from the Canadian segment. That depends on export sales and market conditions within Canada, particularly, government procurement decisions on future projects.
Lance said of its Canadian operations, “MDA remains fully committed to its enduring and valued partnership with the Canadian Government and our Canadian employees. This combination offers the opportunity to deliver future economic and job growth in both Canada and the United States, as we focus on driving sustainable revenue expansion from our investments and create value for all our stakeholders.”
In the investor call he further reiterated the companies commitment to Canada. And why shouldn’t he, before the acquisition of SSL, MDA had revenue of $880 million in 2012. Obviously made in Canada is still going to be an important part of revenues going forward. And unlike the ATK deal in 2008 where MDA was being acquired, this is MDA acquiring another U.S. asset.
At the end of the day MDA is a public company. It must play within the regulatory framework of Canada and the U.S., but it moves forward with growth on its mind and shareholder value. If the regulatory approval is met, it’s up to the shareholders to decide if this is a good deal for them.