Two Telco Partner Giants to Come Together, Create $670M Superstar

A telecom titan plans to buy TeleCommunication Systems (TCS) for $430.8 million, creating a solution provider behemoth with 2,000 employees and robust public safety and commercial capabilities.

Melville, N.Y.-based Comtech Telecommunications said its purchase of Annapolis, Md.-based TCS, No. 65 on the CRN 2015 Solution Provider 500, will create a more diversified product offering and reduce its dependence on volatile international and emerging markets. The deal needs to be approved by a majority of TCS' shareholders, and is expected to close no later than March, according Comtech.

Comtech President and CEO Stanton Sloane will lead the $671.4 million combined company, which will be headquartered in Melville. Comtech said it does not plan to make any changes in the leadership of TCS' business operations.

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"This acquisition is a significant step in our strategy of entering complementary markets and expanding our domestic and international commercial offerings," Sloane said in a statement.

Neither Comtech nor TCS immediately responded to a request for additional comment.

Comtech, a $307.3 million company with roughly 900 employees, derives just 44 percent of its revenue domestically, while TCS carries out 89 percent of its sales in North America, the companies said. After coming together, the combined company will sell two-thirds of its products and services domestically and one-third internationally.

The deal is set to establish Comtech as the prime contractor on several U.S. government contracts, including for the sale of microwave radio communication products. TCS, a $364.1 million company with 1,000 employees, is a provider of next-generation emergency 911 services to cellular and VoIP providers.

"Our customers will benefit from greater resources and more diverse product offerings, and our employees will benefit from being part of a larger, more diversified company," Maurice Tose, TCS president and CEO, said in a statement. TCS uses a service-focused model, while Comtech operates a manufacturing-oriented business, according to the companies.

TCS brings in half of its revenue from government customers, such as the U.S. Army, Navy, Central Command and Department of Homeland Security, by offering them tactical communications products, managed networks and logistics, and security assessments and audits. The deal will enable Comtech to cross-sell modems and amplifiers to TCS' public sector customers, the company said.

On the commercial side, TCS routes half of all U.S. wireless 911 calls, and also provides companies such as Verizon, AT&T, Sprint and Comcast with managed cloud services and software and equipment for location-based infrastructure. The acquisition should enable TCS to cross-sell these offerings to Comtech's international customers, according to the companies.

Comtech offered to purchase TCS' roughly 86.2 million outstanding shares for $5 each, representing a 13.9 percent premium over the company's trading price the day before the deal was announced. Since the deal was revealed Monday, TCS' stock price has climbed 12.3 percent, from $4.39 per share to $4.93 per share.

The purchase price offers an 8.9-times multiple on TCS' earnings before interest, taxes, depreciation and amortization, which for the most recent 12 months was $40.4 million.

The companies said they have identified $12 million in savings through eliminating redundant job functions, multiple information technology systems and duplicate public company costs. Comtech plans to leverage TCS' enterprise resource planning and customer relations management systems for its existing businesses, the company said.

Overall, Comtech said, the acquisition is expected to result in an increase in jobs.

From a sales standpoint, Comtech said it expects the deal will help accelerate revenue growth of its own product lines as the company capitalizes on TCS' longstanding customer relationships, contract win rate and proprietary technology.

Comtech plans to finance this deal through a credit facility of up to $400 million provided by a major financial institution. The company said it also plans to deploy $149.9 million of cash, cash equivalents and marketable securities to pay for TCS.

Transaction-related expenses for Comtech will total $27.5 million and will primarily cover change-in-control payments, professional fees for financial and legal advisers and debt extinguishment costs, the company said.

TCS announced in July that it has formed a special committee to explore strategic alternatives and had its financial adviser reach out to Comtech shortly thereafter, according to the company.

PUBLISHED NOV. 25, 2015