Gilat Strongly Rejects Comtech’s New Merger Complaint; Seeks Remedies

Gilat Satellite Networks (GILT) has announced that it strongly rejects efforts by Comtech Telecom (CMTL) to halt the pending $523M acquisition deal between the two companies.

At the beginning of the year, Comtech announced plans to acquire Gilat Satellite for $532M in cash and stock.

According to Gilat, Comtech has now filed an amended complaint against Gilat in the Court of Chancery of the State of Delaware seeking an additional declaratory judgment that Gilat has suffered a “Material Adverse Effect” due to the Covid-19 pandemic.

This would mean that Comtech is not required to complete the merger because certain closing conditions of the Merger Agreement cannot be satisfied.

However Gilat believes that no Material Adverse Effect under the Merger Agreement has occurred and that Comtech’s complaint is “nothing more than an effort to avoid its clear contractual obligation to acquire Gilat, due to Comtech’s own rapidly deteriorating performance.”

“Comtech’s continuous willful breaches have resulted and are continuing to result in significant monetary damages to Gilat and its shareholders, and are expected to amount to hundreds of millions of dollars if the merger is not consummated” the company said.

Indeed, Gilat believes that Comtech is willfully trying to ensure that the Russian Federal Anti-Monopoly Service (“FAS”) approval is not obtained in time so that Comtech will not be required to consummate the merger.

Gilat says it intends to vigorously defend its position in connection with the claims raised by Comtech and intends to file a counter claim against Comtech.

This counter claim will seek, among other things, a declaration that Comtech cannot terminate the Merger Agreement and, if the merger does not occur, Comtech should pay Gilat monetary damages (which are contractually uncapped).

Shares in Comtech have plunged 57% year-to-date, but analysts have a cautiously optimistic Moderate Buy consensus on the stock’s outlook. That’s with an average analyst price target of $29 (91% upside potential). (See CMTL stock analysis on TipRanks).

“A potential exists that the chairman of the Russian commission reviews the Gilat deal. If he does, the review could push the closing past the Oct. 28 drop dead date. Also, Gilat reported an EBITDA loss of $5 mil in its Mar. qtr. Those results, while affected by CV19 business restrictions, could be considered a material adverse change relative to original contractual provisions in our view” Northland Securities analyst Michael Latimore wrote in June.

He has a buy rating on Comtech, but dropped his price target from $27 to $24 after the company reported its fiscal third quarter, which coincided almost perfectly with the worst of the COVID crisis. Revenue declined nearly 21% year-over-year to $135.1 million and down 16% sequentially.

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