Comtech Picks Up CPI for $472.3 Million

Comtech Telecommunications (CMTL), which develops advanced communications solutions, focuses on top players when making acquisitions. This strategy is clearly evident in the company's latest deal: the $472.3 million purchase of CPI International (CPII), which develops radio frequency microwave technologies.

The deal will consist of $372 million in cash and 4.4 million shares of Comtech. In all, the price tag comes to a 25.7% premium to Friday's close.

When the transaction is finalized, Comtech will pay off CPI's debt, which means there will be between $150 million and $200 million in available cash.

The Power of RF

CPI uses radio frequency (RF) technology for weapons guidance, signal-jamming and threat-tracking. The company has a portfolio of over 4,500 patents. Roughly half of its revenue come from U.S. and foreign governments. In fact, CPI is one of only three companies in the U.S. that has the expertise to build high-powered microwave products for advanced military programs and platforms.

In addition, CPI has been able to build a strong commercial business, which has helped to diversify its customer base. The company's products are in roughly 125 U.S. defense systems and more than 180 commercial platforms.

What's more, the average life of CPI's products are anywhere from three to seven years. As a result, about 40% of last year's sales came from replacements, spares and repairs. Essentially, this is an annuity-like revenue stream, which has been fairly stable over the years.

The Combination

The acquisition of CPI will triple the size of Comtech's RF microwave amplifier segment and is forecasted to generate more than $50 million in annual EBITDA. Moreover, the expanded access to resources should lead to further innovation, as well as increased revenue opportunities.

At the same time, Comtech is expected to realize cost synergies -- of $5 million to $7 million -- in the second year after the close of the deal. This will involve consolidating facilities and securing various tax advantages.

Besides, Comtech certainly understands the RF business and also has a successful track record with acquisitions. In light of all this, it's no surprise that investors like the deal: The stock price is up almost 4% in midday trading Monday.