Saturday, November 07, 2015

Should the proposed COM DEV sale to US based Honeywell trigger the Investment Canada Act?

          By Chuck Black

It's official. US based Honeywell International, a Fortune 100 conglomerate that produces a variety of commercial and consumer products, services and systems for private consumers, major corporations and governments, has offered to purchase Cambridge, Ontario based COM DEV International, one of the three largest Canadian space companies, for what is generally estimated to be $455Mln CDN.

But that total doesn't include the expected proceeds to shareholders from the public offering for exactEarth - a COM DEV subsidiary - which could potentially add enough to the deal to drive it past the $600Mln CDN total needed to trigger a Federal government review under the Investment Canada Act (ICA).

The 2014 COM DEV annual financial report. According to the company website, "COM DEV manufactures advanced technologies and subsystems which are sold to major spacecraft builders and space agencies worldwide for use in communications, space science, and remote sensing. Our technology is used on more than 950 spacecraft to date, including 80 percent of all commercial communications satellites ever launched. In addition, through recent acquisitions we are taking our core expertise in RF/microwave engineering into non-space niches where customers value premium RF performance and high reliability in harsh environments." As outlined in the January 15th, 2015 press release, "COM DEV Announces Fourth Quarter and Year-End Fiscal 2014 Results," total fiscal year 2014 revenue was $208.2Mln CDN, down 3.4% from fiscal 2013, largely as a result of continued U.S. government spending constraints. But revenue in the commercial equipment sector increased year over year by 26.5% to $137.4Mln CDN from $108.6Mln CDN during the same period.  The company employs  1,250 people in Canada, the United Kingdom, the United States, India and China. Graphic c/o COM DEV.

As outlined in the November 5th, 2015 COM DEV press release, "COM DEV announces acquisition by Honeywell and spinout of exactEarth," the real offer on the table is as follows:
  • COM DEV shareholders will receive up to $5.25 CDN in cash per share of COM DEV they currently own (for an estimated total value of $455Mln CDN), plus 0.1977 of a share of exactEarth Ltd., for an aggregate implied transaction value of up to $6.54 CDN for each COM DEV share.
  • exactEarth Ltd. will become a standalone public company.
An aggregate implied transaction value for the total sale (including the exactEarth shares) at a price of $6.54 implies a total valuation of approximately $580Mln CDN (with approximately $125Mln CDN of the total attributable to exactEarth shares), which is just under the current $600Mln CDN "threshold for review" as listed on the ICA webpage.

However, at least until the latest announcement was made this week, the estimates of potential exactEarth value have generally been far higher.

And, as outlined in the November 6th, 2015 CanTech Letter post, "Honeywell acquisition is no slam dunk for Com Dev shareholders, says Paradigm," the implied transaction value for exactEarth has always been flexible and subject to the vagaries of the marketplace.

The article quoted Paradigm Capital analyst Daniel Kim as stating that the current $125Mln CDN valuation for exactEarth in the latest offering is "far below" the previously floated IPO range of from $157Mln to $187Mln CDN for the company.

Kim also confirmed a much higher potential value for a stand-alone exactEarth, and thinks the Honeywell offer provides a “huge” potential upside for the educated investor.

A valuation of even $157Mln CDN for exactEarth, when added to the Honeywell valuation of $455Mln CDN for COM DEV would place the total value of the deal at $612Mln CDN, well over the $600Mln CDN required to trigger a Federal government review under the ICA.

Even the valuation of COM DEV alone could be problematic from the ICA perspective. As per the November 8th, 2015 Space News article, "Honeywell To Acquire Component Maker Com Dev," Com Dev has invested in positioning itself for expected, but not yet closed, business from the upcoming 900 satellite OneWeb Constellation (as has at least one other Canadian company, Burnaby, BC based MacDonald Dettwiler). The closing of this business would certainly change the valuation of COM DEV.

As well, the access to the US market, provided through the Honeywell purchase would also increase the profitability of COM DEV, which recently closed a California-based subsidiary staffed with US security cleared personnel, for lack of work.

A quick, 60 second overview of the Investment Canada Act, from Omar Wakil, for the Canadian Bar Association. Screen grab and video c/o

Of course, any deal still requires the support of two-thirds of shareholders, who are expected to vote on the offer at the January 2016 COM DEV shareholders meeting. Only then will we find out what the investors think about the "enterprise value" of their investments.

But there are also national security provisions in the ICA.

These provisions, separate from the well understood "net benefit review" which has been in place since the 1980's, are far less well understood and have only been in place since 2009. Under the Stephen Harper government, there wasn't a lot of guidance or public discussion about how the provisions were enforced, and it's not likely that the current government will get up to speed in this area anytime soon.

Chuck Black.
For context, previous ICA reviews began the process which aborted the 2009 sale of Burnaby BC based MacDonald Dettwiler (MDA) to US based Alliant Techsystems (ATK) and halted the 2010 sale of the Potash Corporation of Saskatchewan to Anglo-Australian mining firm BHP Billiton, even after the shareholders had spoken.

So if you're opposed to the sale of an iconic Canadian company to a US multinational, this is a good a place as any to start.

Chuck Black is the editor of the Commercial Space blog.


  1. agreed - with a new government who likely does NOT want to loose a tech gem like Comdev - we need a detailed and onerous review - w/o some guarantees HW will take what they want - like the Borg back to their sandbox.

  2. Based on yesterdays news, it looks like the new government was perfectly happy to loose "a gem like Comdev." See for more.


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