Comtech Sees Silver Lining in Possible Delay to U.S. Army Contract

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PARIS — Satellite communications equipment provider Comtech Telecommunications on Dec. 9 said it expected to conclude an acquisition in 2011 that may be as big as the company’s failed attempt to purchase CPI International in early 2010.

In a conference call with investors, Comtech Chief Executive Fred Kornberg also said the company is cautiously optimistic that the U.S. Army, now with excess equipment following the troop drawdown in Iraq and facing budget pressure, may delay a contract for a next-generation mobile communications network.

Such a delay would favor Melville, N.Y.-based Comtech to the extent that it is supplying the Army’s current-generation communications gear but earlier this year lost out to ViaSat Inc. in the competition to provide a related next-generation system called Blue Force Tracking-2, or BFT-2.

Blue Force Tracking systems use GPS and satellite communications links to help commanders identify friendly forces and thus cut down on incidences of battlefield fratricide.

The Army had indicated that its next-generation network likely would combine today’s Comtech-built Movement Tracking System (MTS) with the BFT-2 for the next generation of communications gear.

Comtech is prime contractor for both the current MTS and the current BFT-1 network under indefinite-delivery, indefinite-quantity contracts with the Army.

In the three months ending Oct. 31, the first quarter of Comtech’s fiscal year 2011, the MTS and BFT-1 work accounted for nearly 54 percent of the company’s total revenue.

As of Oct. 31, Comtech had received $290.9 million in orders under the BFT-1 contract, which was valued at up to $384 million. For MTS, which uses L-band satellite signals to track mobile assets and permit short messages, Comtech had received $669.2 million of a potential $899.1 million.

Comtech’s loss of the BFT-2 contract to a sharply lower-priced bid from Carlsbad, Calif.-based ViaSat had raised, for Comtech, the specter of an Army move to proceed to a next-generation mobile system, called Joint Battle Command-Platform, that would merge BFT and MTS. While Comtech had every intention of bidding on this contract, the BFT-2 decision was not a good omen for the company.

Kornberg said the Army’s decision, announced Dec. 7, to extend by six months its MTS contract with Comtech, may signal that the service is thinking twice about an early competition for the Joint Battle Command-Platform system.

Kornberg said the repeated delays in an expected request for bids from industry could mean the Army will stick with its current technology, and the services Comtech provides with it, longer than expected.

“Obviously there is a lot of hardware out there that we have supplied over the years,” Kornberg said. “Since Iraq has kind of downsized, there’s a lot of hardware in both the MTS and BFT-1 programs” that is now available. “As you can see, the Army is just not ordering any hardware now for some time. Certainly they are planning to go to the BFT-2 platform, and eventually to the [Joint Battle Command-Platform]. But if things just flatten out in terms of budget constraints,” there could be substantial delays.

With more than $600 million in cash, Comtech has been on the hunt for acquisitions for some time. In May it agreed to purchase electronics manufacturer CPI International of Palo Alto, Calif., for some $472 million in cash and Comtech stock.

CPI later backed out of the agreement and in November was purchased by Veritas Capital Fund for $525 million. CPI agreed to pay Comtech a deal-termination fee of $15 million.

“Maybe you could call us cheap,” Kornberg said of the fact that Comtech let CPI get away. More seriously, he said the company is reassessing the valuations it assigns to prospective acquisitions and may need to increase its offer when it settles on a target.

With Comtech stock trading at levels that make it an attractive target as well, Kornberg said the company would be happy to talk to prospective buyers but is otherwise not putting itself on the market. But it is buying back its own stock to support the share price and because, at current levels, it represents a good value, Kornberg said. Comtech has purchased about $30 million of its own stock in the past four months.