Buyers circle Comtech amid activist pressure

NEW YORK Wed Oct 5, 2011 7:37pm EDT

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NEW YORK (Reuters) - Communications equipment maker Comtech Telecommunications Corp (CMTL.O), under pressure from an activist investor to evaluate a sale, is attracting potential takeover interest from several government contractors, people familiar with the situation said.

Comtech, which makes satellite-based communications equipment for the government and commercial customers, is working with Goldman Sachs Group (GS.N) for defense and strategic advice in response to pressure from New York-based hedge fund MMI Investments LP, four of the people said.

It is unclear if Comtech would be receptive to a sale at this point. But the list of potential suitors could include EADS EAD.PA, General Dynamics Corp (GD.N), L-3 Communications (LLL.N), Harris Corp (HRS.N) and BAE Systems Plc (BAES.L) among others, according to the people familiar with the situation.

No bid has been made for Comtech, and it remains to be seen if any of the potentially interested parties would actually step up to make an offer for Comtech. The U.S. defense industry is grappling with uncertainty presented by looming budget cuts and the pullout of troops from the Middle East.

MMI, which has amassed stakes in several defense technology companies over the past year and successfully pushed for deals in some cases, reported a 3.3 percent stake in Comtech last week and urged the company to evaluate a sale.

Comtech, which has said it will pursue growth with targeted acquisitions, is scheduled to meet with shareholders in the next few weeks to hear their views, three of the people said.

Shares of Comtech rose 0.8 percent to $28.20 on the Nasdaq on Wednesday, valuing the company at about $660 million. The stock rose 8 percent in aftermarket trading to $30.50.

Representatives for Comtech, Goldman Sachs and MMI declined to comment.

Comtech has long been seen as a takeover candidate for larger aerospace and defense companies, and over the past several years has held multiple discussions with potential buyers, people familiar with the matter said.

Airbus parent EADS was close to buying Comtech in 2008 but abandoned the deal as it faced threats to its cash pile from costly aircraft delays and penalties, these people said, adding that EADS had also explored a Comtech takeover several years prior to that.

Comtech also held a series of discussions with interested buyers as recently as 2010, after it scrapped plans to buy smaller rival CPI International Inc, but those talks fell apart over price, two of the people said.

Over the past two years, Comtech lost two of its largest military contracts in its mobile data communications business that together represented roughly half of the company's total revenue for fiscal 2010 and 2011.

Comtech expects fiscal 2012 revenue to be "materially lower" than the $600 million seen in 2011, after the loss of the two contracts. It had $558.8 million of cash and cash equivalents as of July and has been under pressure to use that cash to grow or return more to shareholders.

Potential buyers, both trade and private equity buyers, have been concerned about Comtech's declining revenue outlook stemming from the contract loss, sources said.

"Now that they've gone through most of the decline already, by the time you buy it that decline is no longer as much of an issue as it was six to nine months ago," one of the people said.

Its longer-term growth outlook is also supported by the changing nature of global warfare, where governments increasingly focus on information and communications technology as security threats evolve from tanks and guns to the bits and bytes of cyber and communication networks.

The aerospace and defense sector has seen increasing shareholder activism over the past year as stocks languish across the board amid worries about severe budget pressure.

Last year, MMI urged long-time takeover target Applied Signal Technology to solicit buyout offers, resulting in a $490 million sale to Raytheon Co (RTN.N). MMI was also behind the $506 million sale of satellite company EMS Technologies to Honeywell International Inc (HON.N) earlier this year.

Over the summer, MMI amassed a near 10 percent stake in Kratos Defense & Security Solutions (KTOS.O), spurring a strategic review by the company.

Kratos has received little buyer interest, according to people familiar with the situation, and the company's stock has declined about 40 percent since early August, when MMI first disclosed its stake.

(Additional reporting by Paritosh Bansal; Editing by Matthew Lewis and Steve Orlofsky)

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