Scotia Capital on Canadarm sale

Further to our post of earlier today (“”, June 14-07), Scotia Capital has published a note on the impact that a US$1 billion sale of the Information Services Group could have on MacDonald, Dettwiler & Assoc. (MDA:TSX). Before I get to Paul Steep’s research note, the stock is up about $5 on the rumour, first discussed in the WSJ. This big move in MDA’s shares ($5 jump represents a market cap increase of more than $200 million) is odd, given the poor reception the assets received, at least at the US$1 billion sale price according to the WSJ’s sources:

“Four large U.S. defense contractors, including Lockheed Martin Corp. and Raytheon Co., have expressed interest and engaged in preliminary acquisition discussions, these people said. At this point, they have opted against making a formal bid after concluding the asking price was too high.”

Here’s the summary of Scotia’s note:

“Reports are circulating in the media that MDA is considering the sale of its Information Systems Group (ISG) for approximately $1 billion.

Our view is that if MDA is able to secure a transaction for the sale of the entire ISG division for ~$1 billion it would be a meaningful positive for shareholders. We believe the firm would benefit from a clearer investment thesis and access to additional funds to purchase accretive acquisitions in the IPG area. The potential sale of ISG for $1 billion implies a ~12.8x EV/EBITDA F08E multiple for this business representing a meaningful strategic premium over defense and aerospace firms (trading at 8.6x on F08E). Our analysis indicates that value for MDA, assuming a sale of ISG, would imply values between $55 and $57/share assuming no multiple expansion for IPG. Risks to MDA’s stock remain the potential for the removal of HIPs, which would cause a meaningful reduction in consensus estimates, and the probability associated with completing a divesture of ISG.”

Despite the precision of the WSJ story, and the undoubted double-checking that went into that scoop, here’s what MDA has to say about it all:

“RICHMOND, BC, June 14 /CNW/ – MacDonald, Dettwiler and Associates Ltd.
(TSX: MDA), a provider of essential information solutions, announces in
response to today’s articles in Wall Street Journal and the Globe and Mail
that there are no discussions underway with any party to acquire MDA or any of
its business units or subsidiaries.”

Reminds me of a certain press release that BCE put out a few weeks ago (see “BCE takeover part 2“, March 29-07).

The stock will sell off on this release, but for the wrong reasons. It’s not that MDA isn’t looking for US$1 billion for the division, as reported, it’s that no one wants to pay 12.8x EBITDA in an industry that trades at 8.6x. Jazzy NASA contract or not.

Stay tuned to this square.

MRM