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Telit Communications to keep pursuing acquisitions in 2011 after deal falls through

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Telit Communications (LON:TCM) revealed that it has been actively exploring a potential acquisition, however it failed to secure the deal. However, “Telit will continue to explore consolidation value enhancing opportunities in the New Year," it said.

It believed the acquisition would have materially expanded the company’s reach and scale.

The company incurred professional fees as it pursued the deal. Now it expects full year profits to be adversely impacted by around US$400,000.

“The board continues to consider that the highly competitive and specialist nature of the machine-2-machine market will lead to the market consolidating around a small number of focused major operators, including Telit,” the company said.

On AIM, the stock’s 8.5 percent decline reflect a certain amount of disappointment among investors, however at the moment it merely seems like a bit of a blip - in the context of stock’s exceptionally strong upward trend since May.

The stock has more than trebled in value over the past 7 months or so, rising from just 25 pence per share in early May.

Since then investors have really got behind the company and before today’s statement the share price was the highest it had been since spring 2008.

By early afternoon, Telit shares had dropped 6.75 pence, or 8.5 percent, to trade at 72 pence per share.

Merger and acquisitions (M&A) has been a hot topic in the M2M sector for sometime, and indeed Telit recently told investors that it ready to hit the acquisition trail, back in its interim results statement in September.

Telit’s revenues grew 61 percent, to US$59.6 million, in the first half of 2010 and it reported adjusted earnings (EBITDA) for the six months of US$5.4 million. 

Immediately after the interims, Northland Capital - then named Astaire Securities - upped its revenue forecasts substantially. It expects Telit to generate revenues of U$131 million during the whole year, with earnings expected to reach US$12.5 million. 

Speaking with Proactive Investors, after the interims, Telit’s chief financial officer Yariv Dafna said: "There are a lot of M&A opportunities we would like to address."

Last month a research note by Northland Capital analyst David Johnson centred on a spate of M&A activity among Telit’s peers.

Recently Novatel Wireless (NASDAQ:NVTL) bought privately-held Enfora for up to US$70 million.

Johnson highlighted that Enfora was ranked as the 4th largest player in the sector in 2009, with 5 percent of the market - behind Telit with 12.4 percent, Sierra Wireless (NASDAQ:SWIR) with 26.3 percent and Gemalto’s (EPA:GTO) Cinterion unit, which leads the sector with 28 percent.

“The M2M market has undergone a period of considerable consolidation with three of the four largest suppliers having now changed hands and there is scope for further activity,” Johnson said.

The analyst also stressed that Telit could command a premium rating compared with its peers. According to Johnson Telit has demonstrated much greater revenue velocity than the market and it has secured a larger percentage of design wins than its market share.

 

Quick facts: Telit Communications PLC

Price: 128.4 GBX

AIM:TCM
Market: AIM
Market Cap: £167.19 m
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