Maxar Technologies (MAXR) is an end-to-end space solutions business which is currently undergoing a deleveraging effort following the acquisition of Digitalglobe in 2017.
That transaction, valued at $3.6 billion enterprise value ($2.4 billion for the equity plus $1.2 billion net debt assumed), resulted in the combined entity taking on too much debt which, when coupled with a declining geosynchronous satellite business at the subsidiary Space Systems Loral ("SSL"), created much uncertainty related to MAXR's balance sheet. The result: MAXR's share price dropped from $53 to $4 peak to trough from August 2018 through March 2019. The stock is still heavily shorted with 10.5M shares held short as of June 14 which is about 17.5% of the total 60M share count.
Additionally, the company tried to sell the SSL business which didn't result in a transaction; Digitalglobe's WorldView-4 satellite malfunctioned (but resulted in $183M insurance claim that has been fully received); former CEO Howard Lance was replaced by former Chief Legal Counsel at Digitalglobe, Dan Jablonsky; the dividend was cut to 1c per quarter; the company announced a restructuring designed to save $60-$70M per year; a parcel of land in Palo Alto was sold for $70M to help delever; and the company amended its credit agreements to allow for more room on leverage ratios ranging up to 6x adjusted EBITDA depending on time frames.
Sound exciting yet?
The special situation comes in the wake that management disclosed it is “leaving no rock unturned” relative to deleveraging the balance sheet. In the last few weeks, it was reported that its profitable MacDonald, Dettwiler and Associates (“MDA”) is up for sale. According to the Reuters report, MDA generated north of trailing $100M trailing twelve months EBITDA and could fetch north of $1B.
Some have suggested that this sounds outlandish given the current market cap of the entire MAXR business stands at about $550M and because the space systems segment produced only $5M adjusted EBITDA in 2018. The fact SSL produced negative $80M EBITDA in 2018 masks the profitability of MDA. Yet a consortium made of French and Italian defense contractors, Thales(OTCPK:THLEY) and Leonardo (OTCPK:FINMY), appear to be interested in at least a portion of the MDA business, specifically the antenna technology. MDA is also a world leader in space and commercial robotics.
Interestingly, MDA is providing 3,600 antennas for 900 low earth orbit (“LEO”) satellites for the OneWeb constellation. MDA was selected as a subcontractor on the project by Airbus (OTCPK:EADSY). To make matters more interesting, Thales, Leonardo and SSL are competing against Airbus for a reported $3B LEO constellation bid for Telesat, a Canadian satellite operator 62.5% owned by Loral Space Communications (NASDAQ:LORL).
Turns out that LORL sold MDA the SSL business in 2012 for ~$1B. Moreover, Thales, Leonardo and Airbus are promising Canadian production as part of the LEO deal, so having a local presence is key. And MDA is a distinctly Canadian business, having been instrumental in space robotics such as the Canadarm 1, 2 for the International Space Station and likely the Canadarm 3 project for NASA’s Lunar Gateway Project. MDA also runs the RADARSAT program for the Canadian government.
All this puts Maxar and MDA in a unique situation. Maxar completed its US domestication on January 1, 2019 so it could focus on government contracts in the US so MDA isn’t necessarily owned by a Canadian company anymore. And MDA has resident knowledge of building antennas for the OneWeb constellation, selected by Airbus. Telesat has a prior relationship with SSL as a result of the sale from Telesat majority owner LORL. And SSL is part of a consortium whose technologies for the LEO bid have been certified by Telesat (Airbus’ design has been approved as well).
Is it within the realm of possibilities that Telesat would like to award the $3B tender to Thales, Leonardo and SSL but is hesitant given the balance sheet situation at MAXR? This is speculation now, but perhaps Telesat is whispering to Thales and Leonardo that if Maxar’s balance sheet gets cleaned up it is their deal to lose. In that case, MDA is highly strategic for Thales and Leonardo, and even Airbus for that matter. Assuming Thales/Leonardo piece of the $3B Telesat bid is $1.5B, missing out on that deal likely results in about $150M lost profits assuming 10% operating margins and, more importantly, losing a reference account to Airbus.
And now is not the time to be losing important reference accounts as the LEO constellation market heats up. Amazon (AMZN) is launching 3,200 LEO satellites to support its pervasive broadband initiative Project Kuiper. And SpaceX is launching up to 12,000 LEO satellites as part of its Starlink project. This appears to be a growth industry that is highly strategic for many manufacturers including Thales, Leonardo and Airbus.
Conclusion
Maxar has too much debt. The management team isn’t shy about saying it. MAXR has a $250M principal payment due in October 2020 and October 2021. It is abundantly clear that the company needs to sell an asset, or risks flying too close to the sun. That’s why these discussions are likely happening now, in addition to the fact Telesat is expected to make a decision on its vendor selections for the LEO constellation by this fall. Maxar needs to get its ducks in a row now.
When coupled with the fact that CEO Dan Jablonsky and a few of the MAXR board members (including the Chairman) come from Digitalglobe, I don’t believe they hold any special allegiance to the SSL or MDA assets.
In fact, my guess is they would like to return Maxar to a pure play on higher margin, subscription and software revenue from its 15+ year library of high resolution earth imagery. Digitalglobe is on pace to do about $850M revenue at around 60% EBITDA margins this year — it’s clear why they would favor this business over the space solutions side of the house. The company is adding new functionalities and adding new customers (deal sizes in $100k to $1M+) to create a more resilient recurring revenue business in addition to the $300M per year EnhancedView contract with the US National Geospatial-Intelligence Agency.
As a back of the envelope valuation, I’m assigning a $3.6B valuation to Digitalglobe and $1B valuation to MDA and a zero value to SSL, collectively $4.6B. After deducting $3.1B in net debt (estimated), the equity is worth $1.5B or about $24.50 per share using 61M shares out.
Lastly, it should be noted that MDA had an agreement in principle to be acquired by Minneapolis based Alliant TechSystems in 2008 for $1.3B, but the Canadian government blocked the deal because it didn’t want it to go to a foreign defense contractor. Alliant was subsequent acquired by Orbital which was subsequently acquired by Northrup Grumman (NOC).
Perhaps this time it is different for a potential MDA sale. If so, MAXR shares could be on their way into higher orbit.