What Telular's SkyBitz Acquisition Means For The Financials And High-Yield Dividend

| About: Telular Corporation (WRLS)

Telular (WRLS) agreed to acquire SkyBitz for $42M in cash and stock on Monday Dec. 5. This is a major transaction for Telular, increasing the size of the company approximately 70%.

Telular's main business focus consists of the following segments:

Telguard: Provides primary and backup alarm communication solutions for residential, VoIP, small business, financial, commercial and fire system markets. These products transmit full data from virtually all security and fire systems to central stations using the cellular network.

TankLink: Tank monitoring products offers solutions for M2M communications. Tank monitoring and automatic replenishment solutions help address the inventory management needs in the petroleum logistics, bulk chemicals and bio fuels industries.

SkyBitz will make up the third segment. Based outside of Washington, D.C., SkyBitz provides real-time information on the location and status of assets. More than 700 enterprises rely on SkyBitz technology. SkyBitz delivers its solution via SkyBitz Insight, a secure web-based application that is fully customizable and requires no software downloads.

Transaction terms include a purchase price of $42 million, including $35 million in cash and $7 million in newly issued shares of common stock.

SkyBitz is a privately held company. The financials are not publicly available. Here is what we know based on the press release and conference call:

  • Annual revenue is approximately $35 million
  • Recurring service revenue is approximately $16 million
  • Product revenue is approximately $19 million
  • Margins are similar to Telular
  • ARPU (average recurring revenue per unit month per asset/subscriber) is in the middle of Telular’s Telguard and Tanklink ARPU numbers
  • Net income before non-cash items is approximately $5.0 million
  • SkyBitz expects to be tracking and managing approximately 190,000 assets for 2011; an 11% growth rate

We can approximate a SkyBitz income statement that fits the above criteria as shown below:

(Click chart to expand)

SkyBitz_Financials-gifClick to enlarge

Using this we can project Telular-SkyBitz pro-forma financials using FY2012-Q2 as the closing date for the transaction. A complete set of updated detailed financial data and projections supporting the following results can be found here.

The cash portion will be financed with a $30 million five-year bank loan and cash on hand. Loan amortization is expected to be 10% the first year and 15% in year 2. The interest rate is about 4%. The question is how secure is the dividend? Telular uses net income before non-cash items as a measure of its ability to pay the dividend. This metric represents net income plus non-cash compensation, depreciation and amortization and non-cash deferred tax provision. The following compares Telular’s stand-alone numbers vs. the results from the combined entity.

WRLS_NetIncBeforeCash

The deal makes sense from this perspective since it is immediately accretive to cash.

The deal includes dilution of approximately one million shares, increasing the dividend payout. We estimate the total cost of the dividend vs. net income before non-cash items as:

Income from continuing operations before non-cash items

Fiscal Year

Pro-forma

Dividend payments

difference

Payout ratio

2012

$12,510

$7,200

$5,310

58%

2013

$15,841

$7,900

$7,941

50%

2014

$16,354

$8,700

$7,654

53%

2015

$18,267

$9,500

$8,767

52%

Click to enlarge

The above assumes management continues the policy of raising the dividend four cents a year. This seems very doable based on the payout ratio and management’s ability to grow the business. The bottom line is the dividend is safe using the metrics provided by management. The CEO-Joseph Beatty echoed the same sentiment on the conference call.

It’s important to note the numbers are based on the company repaying the loan in five years. When the loan is paid off approximately $8 million will begin to flow into the bottom line, pushing this metric close to $30 million a year. On the other hand if the loan is extended the shorter-term payout ratio would be more attractive than shown due to a reduction in the quarterly debt payments spread over a longer period.

The deal appears to be a win-win for both companies and the market seems to agree based on the reaction to the announcement.

Disclosure: I am long WRLS.