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Telit shares higher on news of Motorola m2m acquisition, Northland bullish on growth potential

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It took investors a while today to warm to this morning’s news from Telit Communications PLC (LON:TCM) that the machine-to-machine wireless technology specialist is buying Motorola’s (NYSE:MSI) m2m operations.

Telit is paying US$26 million and is launching a placing at 80 pence a share to finance the deal.

The stock rose in early deals but gave back gains again pretty quickly. But it was up 5.7 percent in early afternoon trade at 74 pence.

There has been considerable consolidation in the m2m sector of late and Telit had been saying it would be seeking value-enhancing acquisitions this year. It expects the deal to be earnings-enhancing in the first full year of ownership.

Northland Capital commented on the deal in its ‘Morning report’ today, saying: “Having been to the altar on a couple of previous occasions, Telit is now set to be part of the consolidation in the M2M market.”

The acquisition brings some functional additions but more importantly access to the Motorola m2m customer base, the broker said. Design and product lifecycles are long in the M2M sector and supplier switching very rare as changing the module would require substantial product redesign.

From Motorola’s perspective, the division was non-core and subscale and its departure from the sector follows the lead of a number of other manufacturers that came from a handset angle.

“The consideration implies a revenue multiple of 0.5x, below Telit’s 0.6x FY10 market cap/revenues and other deals in the market (typically 1.0x), suggesting a keen deal. We would argue that Telit’s growth profile demands a premium rating and we maintain Sector Outperform and 125p price target,” Northland added.

Telit currently estimates that the combined business would have had consolidated pro forma revenues of approximately US$180 million in 2010.  Based on independent market forecasts, it is estimated that the combined business therefore would have had pro forma market share in excess of 20 percent for the year ended 31 December 2010.

To finance the acquisition, Telit has conditionally placed 23,793,750 new shares at 80 pence, a 14.3 percent premium to yesterday’s closing price of 70p, to raise £19.0 million before expenses. The shares have been placed with institutional and other professional investors and has been fully underwritten by Investec. The new shares represent approximately 23.6 percent of the enlarged share capital.

Quick facts: Telit Communications PLC

Price: 128.4 GBX

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