Gilat Seeks To Boost Government Business with $130 Million Wavestream Purchase

by

NEW YORK — Satellite ground terminal and services provider Gilat is purchasing satellite power-amplifier manufacturer Wavestream for $130 million in cash in Gilat’s latest bid to raise its profile for military and other government markets, particularly in the United States, Gilat announced Oct. 13.

Petah Tikva, Israel-based Gilat said San Dimas, Calif.-based Wavestream expects to report $70 million in revenue for 2010 with a gross profit margin of between 15 and 20 percent. The company has no debt, and no cash reserve to be included in the transaction, Gilat said.

On Oct. 5, Wavestream announced receipt of a $19 million order from General Dynamics SATCOM Technologies for the company’s high-power 50-watt Ka-band solid state amplifiers to support U.S. Army and Marine Corps satellite communications systems. Product deliveries have started.

Gilat, which as of June 30 had $155 million in cash, said it would finance the acquisition with its funds but may raise “a limited amount of financing … to replenish its cash reserves.” The $130 million acquisition price, at nearly two times revenue, may be revised by up to $7 million in the next 12 months depending on Wavestream’s financial performance.

Gilat reported revenue of $108.9 million for the first six months of 2010. In addition to its $155 million in cash, it reported net debt on June 30 of $29 million, and nearly $44 million in receivables. Gilat won a $20 million judgment against a group of investors that had pulled out of a merger agreement, a sum that was not reflected in the first six months’ financial report.

Gilat Chief Executive Amiram Levinberg has told investors in recent months that the company needed to raise its profile with military forces in the United States and elsewhere, a market in which Gilat was not as well positioned as some of its competitors, including Hughes and ViaSat of the United States.

Gilat created, through its Spacenet division of the United States, the Spacenet Integrated Government Solutions division to target the American defense market specifically. It recently purchased RaySat Antenna Systems LLC to bolster its portfolio of gear tailored to communications on the move, again for government and military markets. Levinberg said in an Oct. 13 statement that the RaySat and Wavestream purchases are considered “synergistic.”

“We did solid due diligence on Wavestream, and we believe their products are about the best in the industry in terms of size, weight and power,” said Joshua Levinberg, a Gilat co-founder and now a senior Gilat adviser for strategy. “They sell to the big system integrators, who in turn sell to the U.S government. This is one of the biggest deals we have ever done, and we think it is a perfect fit for our strategy.”

In an Oct. 13 conference call with investors, Amiram Levinberg and Ari Krashin, Gilat’s chief financial officer, said the acquisition would be immediately accretive to Gilat’s earnings. Levinberg said the value of Wavestream lies in its ability to design solid-state power amplifiers for higher-power uses while retaining the low-volume, low-weight advantages these amplifiers have over travelling wave tube amplifiers.

Solid-state power amplifiers traditionally have been used for terminals with less than 20 watts of power, while vacuum-tube amplifiers are used for applications requiring between 200 watts and 800 watts.

“Wavestream has developed a way to make solid-state power amplifiers efficient for high-power transmissions,” Levinberg said. “These are for tens and even hundreds of watts, while retaining the compact, low-weight design.”

Levinberg said the market for high-power amplifiers is estimated at $450 million per year, with a 15 percent compound annual growth rate since 2006. Wavestream’s technology will be particularly useful as American and other armed forces move toward the use of higher-frequency radio spectrum, including Ka-band.

Wavestream products will be integrated into Gilat’s RaySat Antenna business, and Levinberg said each side should benefit from the presence of the other. Wavestream, whose business is mainly U.S.-based and military, will be able to expand into international markets, while RaySat and Gilat generally will have an easier entry into the U.S. Defense Department market thanks to Wavestream’s existing business relations.

Asked whether Gilat may have overpaid for Wavestream given the valuations of other transactions of a similar nature in recent months, Levinberg said: “We have analyzed these other transactions; we know them pretty well. If you make the comparison, Wavestream is just a better company.”