How Much is Andrew Corp. Worth? CommScope May Renegotiate Terms

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Includes: ANDW, CTV
by: CrossProfit

Back in April 2006, Douglas McIntyre called Andrew Corp (ANDW) a yo-yo stock. As it turns out, Douglas was correct. A full year later, ANDW broke through the $12-$13 range that Douglas called back in 2006 and for the very reasons mentioned in his article. The Excellent Foresight Award is indeed well earned.

Back to the Future

A lot has transpired over the past year. On May 31st, ANDW announced plans to merge with ADC Telecom (ADCT) in an all stock transaction. A little over two months later (08/09/2006), the merger was off. This was due to a $1.7B offer from CommScope (CTV) in August 2006. At the time ANDW was valued at $9.50 per share. Likewise, in August 2006 CTV was trading around the $30 mark. Ultimately ANDW rejected the offer. The primary reason for this was valuation. Subsequently ANDW put in its worst quarterly performance in this millennium and posted a loss of $0.38 per share for FY Q4 2006 (ended 09/2006).

As mentioned by Douglas, ANDW had to prove that it has a concrete strategy to grow sales and profits. As of June this year, the market and apparently CTV anticipated that both FY Q3 2007 (ended June 2007) and FY Q4 2007 (ending September 2007) would produce strong results. As Standard & Poor's analyst Jawahar Hingorani said back in June:

On June 27, 2007, ANDW announced it had agreed to a $2.8 billion acquisition by Commscope. We believe the premium paid to ANDW shareholders is fair. We look for the seasonally strong June and September quarters for indications of success in ANDW's emerging market investments.

As if someone hit the replay button from 2006, ANDW reported its worst quarter ever, this time posting a $0.61 loss per share. Now we're not saying that the acquisition is off altogether though the rules of baseball apply. If ANDW pulls one more strike, they will find themselves out of the acquisition game altogether.

As this plays out, we anticipate a renegotiation to come in at $12.80 cash with no stock. Until this month, CrossProfit did not post an acquisition alert in ANDW chart's message box as we anticipated the loss. Logic dictated that once CTV figured out what was going on, they might/would pull their offer. Today the message reads:

Being acquired by CommScope (CTV) at$13.50 cash + $1.50 stock [announced 06/2007] NOTE: ANDW has swung to heavy loss and deal may be re-negotiated - 08/2007

In addition, a revised evaluation line was posted in July 2007 on ANDW's chart, depicting a slide to $12.80.

Today CTV is trading in the $50-55 range. CTV still expects to save $100M in reduced overhead after the acquisition. The real question is; how much is ANDW worth? Wall Street is beginning to realize that the original $2.8B offer is way too high. This is reflected in the rapid decline in CTV's stock price. In addition, Wall Street is assigning a below acquisition price to ANDW stock. Should CTV wish to renegotiate it is not clear if ANDW will receive a break-up fee and if so, how much.

Goodwill & Earnings

We think it would be fair to say that CTV could not have anticipated a $0.61 per share loss. CrossProfit anticipated a $0.11 loss and we were the low-ball fringe analysts on this one. The consensus was for a $0.18 profit excluding one time charges. In addition, the goodwill charge was nearly double what we anticipated though we had no way of knowing that the impairment charge would be taken in Q3 and in one shot. Operating loss for FY Q3 2007 was $85.7 million compared to operating income of $18.0 million for FY Q3 2006. On a year-to-date basis, operating loss was $60.9 million compared to operating income of $47.9 million in fiscal 2006. In addition, we are concerned that ANDW may have lost AT&T (NYSE:T) as a customer.

Should the acquisition go through even at a lower price, it is somewhat noteworthy to mention that ADC Telecom (ADCT) receives an additional $65M break-up fee, on top of the $10M already paid for by ANDW. This is due to a clause in the original agreement from 2006 that states a 12 month period. In theory, this starts from August 2006 when ANDW broke off the merger. We are not sure what happens if CTV breaks off now and enters into new negotiations after FY Q4 2007 figures (ending September 2007) are reported. If we were acting consultants for CTV, we would advise waiting and other caveats.

FY 2007 Earnings Figures

For some reason, Yahoo! Finance seems to be posting some sort of non GAAP earnings figures for ANDW. We are not sure where the quarterly figures are coming from. Reuters figures are correct.

ANDW 1-yr chart

andw

Disclosure: No conflicts.

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