Here's the article....Surprise deal almost doubles WRX's size $173-million takeover: Calgary wireless data service to issue 18 million shares
Carol Howes Financial Post
CALGARY - Wireless Matrix Corp.'s recent acquisition of Norcom Networks Corp., a deal that will almost double its size overnight, took analysts by surprise. The takeover, valued at about $173-million or 80% of its market capitalization when it was announced on Jan. 8, moves the developer of wireless data and fax services beyond its Canadian market and into a new product line.
Norcom provides data communicators and bandwidth/data transport services for remote asset management applications. Its clients include major U.S. firms such as Sears and Federal Express.
But analysts are scurrying this week to come up with new valuations on Wireless Matrix, which will issue almost 18 million shares, including 2.5 million in stock options, as part of the Norcom deal. Wireless Matrix currently has about 22 million shares outstanding.
"[The acquisition] changes the nature of the company in a very material way," said John Grandy, a Toronto analyst with Yorkton Securities Inc., who has put the stock under review.
"Given the fact they are issuing quite a lot of stock, the question is, are they getting enough value out of the acquisition to justify the dilution?"
Virginia-based Norcom is 90% owned by Telenor Mobile Communications, a division of Norway telecommunications giant Telenor ASA.
When the deal is completed Telenor will own one-third of Wireless Matrix, and Wireless Matrix will have tripled to 100 people.
Wireless Matrix, which changed its name last May from Interprovincial Satellite Services Ltd., specializes in providing wireless communication for Internet-enabled data devices in the field.
It focuses on industrial markets such as oil and gas companies that need to monitor remote locations, collecting a monthly fee for its services.
Customers decide whether they want satellite, cellphone, radio or microwave, what data is to be monitored, how frequently and who receives it.
The Norcom acquisition, which gives Wireless Matrix a presence in the U.S. market, is expected to double Wireless Matrix's revenue, adding $40-million to 2002 estimates of $42-million, according to analysts.
As of December Norcom had installed 6,000 units and had revenue of $15-million.
Chris Schnarr, president of Wireless Matrix, said his firm, founded in 1993, will now be sandwiched nicely between an infrastructure powerhouse and a major distributor, energy service firm Schlumberger Technology Corp., with which it signed a memorandum of understanding last year.
The acquisition will also put two key executives of Telenor on its board, including Arve Johansen, Telenor Mobile Communications' chief executive. "For an organization of that international scope to put a chief executive on our board is a big thrill for us," he said.
Shares of Wireless Matrix (WRX/TSE) have slipped about 20% since the deal was announced. They closed yesterday at $8, down 5¢. The stock traded as high as $21.25 last February before the tech market crashed.
Bruce Krugel, an analyst with Paradigm Capital Inc. in Toronto, has maintained a "buy" on the stock, but reduced his 12-month target price to $12 from $26.50 per share.
Aside from seeing the deal as dilutive to existing shareholders, some analysts said they are worried the acquisition will push profitability for Wireless Matrix back by up to nine months.
"This is not the market to do that," said one analyst who asked not to be named. "And that remains a moot point. A lot of things have to go right in order for that to happen."
But Wayne Phipps, a Toronto analyst with Loewen Ondaatje McCutcheon Ltd., has reiterated his "strong buy" recommendation, saying the value of the acquisition outweighs other concerns. His target is also under review. "It's in a perfect position to scale the business quickly," he said, adding that Telenor's investment also adds to its appeal.
"In effect, Wireless Matrix now has a major international wireless leader with a vested interest in seeing the company succeed."
Mr. Schnarr said Wireless Matrix is hoping to sign off on a completed deal with Schlumberger within weeks, an agreement that will aid its international roll-out. He said the company would like to see more partnerships on the distribution side, but for the moment will concentrate on integrating Norcom.