Comtech ($CMTL) announced last week that it is considering selling its ground-based 911 emergency infrastructure business in order to fully focus on space communications.
The board said the company was “in the middle of a transformation journey” and that proceeds from a potential sale would help right-size its balance sheet.
It’s a little biased. In the third quarter, the company reported revenue of $128 million, which was down 6% year over year. Comtech has approximately $160 million in debt, $27 million in cash on hand, and a market capitalization of just $109 million, down more than 50% year-to-date.
Tough times call for tough measures. For management, this means letting go of faster-growing, higher-margin, and more valuable business areas.
Goodbye, Next Generation 911 (NG911) Ground Emergency Call:
NG911 is an upgraded emergency response system that allows you to connect from more devices via voice, text, or video. The July FCC ruling established a new framework that could help accelerate the nationwide implementation of NG911. The division generated $56.6 million in revenue in the third quarter, supporting a strong adjusted EBITDA of $11.3 million. The division doubled its revenue this year, including a $140 million Massachusetts contract renewal.
Satellite communications business:
The company’s satellite communications products include modems, signal enhancement amplifiers, and troposcatter technology. The division primarily serves the Department of Defense and major defense contractors, providing connectivity and coordination to warfighters across branches, an area of military focus. Although quarterly sales were down due to rising geopolitical tensions and defense spending, the company sees its business as ripe for growth. In the third quarter, segment sales were $71.4 million, down both year-over-year and quarter-over-quarter.
Debt, Debt, Debt: In addition to exploring the possibility of selling nearly half of its business, Comtech also announced last week that it had raised $25 million in high-yield subordinated debt. This will further increase the company’s debt burden until the sale is completed.
The company has struggled with debt for quite some time, most recently closing on a $222 million credit facility in June to refinance debt due in October.
The company, which has a market capitalization of just over $100 million, is in survival mode to fend off banks.
The company’s 911 emergency infrastructure business generates a healthy amount of adjusted EBITDA of approximately $40 million annually. A sale of the division could resolve its thorny debt problems and yield a sizable profit. The company also plans to exit its UK subsidiary this year, which it expects to save up to $10 million a year in cash.
The move coincides with a difficult time for publicly traded space stocks. As cash reserves dwindle, public markets are less likely to provide funding, and management teams are increasingly referring to “exploring strategic alternatives.”
