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What should we make of Airvana's (AIRV) announcement that a private equity group is buying the company for $530 million, or $7.65 a share in cash?
  1. With $205 million in cash and equivalents as of September, plus almost $40 million collected subsequently from Ericsson, Airvana has more cash than it needs, so this isn't a deal to bail out a struggling company. It's a deal to take out a public company, and flip it later for a premium. Of the $530 million in cash being paid to public shareholders, roughly half will be coming from the company's own balance sheet.
  1. According to the press release, "certain members of management of Airvana, including Randy Battat, President and CEO, and founders Vedat Eyuboglu and Sanjeev Verma, will exchange a portion of their shares for an equity interest in the acquirer." With management deciding not to cash out completely, it would appear they think there's money being left on the table.
  1. Timing of this deal: set to close before the end of March 2010, possibly before the December 2009 quarter is reported. The December quarter will be the first to be reported since Ericsson purchased the Northern Telecom CDMA business and paid off Aivana's $39.6M invoice (most of which will be recorded as deferred revenue), and billings that were previously deferred due to the Nortel bankruptcy are booked.
  1. Judging from the Q&A attached to the press release announcing the deal, where a number of posted answers oddly failed to answer the posted question, there's no indication that the company has shopped the deal, implemented a breakup fee, or signed up its major shareholders. This is not what one would expect of a solid deal intended to discourage competitive bidders. From the press release:
  • "Did the Special Committee consider other strategic alternatives for the Company?
    The Special Committee believes that this transaction represents fair value for the Company and is in the best interest of its shareholders."
  • "Is there a breakup fee on this transaction?
    Our SEC filings will describe all relevant terms of the transaction."
  • "Do you expect all of the major shareholders to vote for the transaction?
    A Special Committee of our Board and our Board have recommended the transaction to our stockholders. "
Airvana's Fundamentals
Airvana sells telecom solutions that enable broadband wireless, to date in the 3G EVDO CDMA sector, but also in the emerging femtocell space. The company cratered last year when Nortel, its major OEM, filed for bankruptcy. Although the fundamentals of their business have remained intact, orders were deferred as the messy business of auctioning off the Nortel CDMA business to the winning bidder, Ericsson, took most of 2009 and only closed last month. At this point, Airvana's core EV-DO business, a cash flow positive, nicely profitable software upgrade business, is scheduled for 3 major releases in 2010. Of more interest to growth investors, its recently launched femtocells are positioned to help address the shortfall in mobile broadband capacity that is challenging major wireless incumbents, with commercial operators expected to launch in 2010. Airvana has agreements with four OEM customers to deliver UMTS femtocell product solutions and agreements with four OEM customers and one operator customer to deliver CDMA femtocell product solutions. Airvana is one of the few US femtocell suppliers.
Quotes from Airvana's Q3 press release showcase the company's turnaround prospects:
  • “Looking ahead, we expect continued growth in data traffic, which is increasingly fueled by the growth of smartphones, to drive healthy demand for our EV-DO products in the fourth quarter of 2009...We expect to start shipping upgrades of our version 8.0 software in conjunction with the closing of the Ericsson/Nortel transaction, which we now expect to occur in November. As a result, we expect fourth quarter 2009 EV-DO Billings to be higher than the fourth quarter of 2008, and second half EVDO shipments to be higher than the first half of this year...We have a lot of software in the development pipeline for our EV-DO customers...We expect to deliver three major releases in 2010.”
  • “The femtocell’s time has come...We have been awarded several commercial deployments around the world with contracts in place and purchase commitments for significant volumes in 2010 and beyond. Both our CDMA and UMTS femtocell products are in the final stages of software development and testing, with commercial production starting late this quarter and ramping in the first quarter of 2010. We expect operator launches with Airvana products, especially in North America and Asia, starting in the first half of 2010...We expect to ship limited quantities of femtocell pre-production units in the fourth quarter of 2009, and we expect femtocell products to represent less than 10% of billings for the fourth quarter of 2009 and the full year...We expect to start volume production of femtocell products in the fourth quarter of 2009 with shipments ramping significantly in 2010.”
Femtocells as a solution are still relatively unknown and controversial, primarily because many people think it doesn't make sense for consumers to pay for a device that solves a carrier problem. The concept is simple: these boxes will connect to a high speed internet connection on one side, and create a small wireless cell on the other, solving the carrier problems of limited wireless bandwidth or poor coverage. The actual implementation is more complex as femtocell equipment is required not only in consumer or business premises, but also in the carrier network, and femtocells can't interfere with existing wireless networks.
Over the past few months, the hue and cry over inadequacy of existing carrier spectrum for the emerging mobile broadband world has highlighted the opportunity for femtocells. Traction to date has been limited as few 3G femtocells are in the market and carriers have not fully subsidized the device cost. If, however, broadband wireless bandwidth becomes scarce, as virtually everyone expects, carriers are likely to deploy multiple methods to service customer requirements. Of the various options, which include 4G and WiFi, femtocells are one of the most appealing due to their relatively low deployment cost and retention of the proprietary cellular link which binds the customer to the carrier.
Having said that, femtocells are ultimately more likely to be integrated with other customer premises equipment. Airvana has already started down this path, announcing femtocells products that also embed an IP router and an analog telephone adapter (which allows consumers to connect existing cordless handsets into the device and send all voice traffic -- both wireless and wired -- over an internet connection). For a wireless solutions provider that wants all the key technologies in its portfolio --WiFi, Bluetooth and femtocell -- this company has appeal. It's not difficult to envision other potential suitors for this company.

Disclosure: Long AIRV
Source: Airvana's Peculiar Acquisition Announcement