Maxar Technologies Ltd.
Strained by the levered acquisition of Space Systems Loral in 2012 at the cycle peak, MacDonald Dettwiler’s (MDA) acquisition of DigitalGlobe (DGI) in 2017 was done out of necessity to cover-up growing accounting and financial strains. Rebranded Maxar Technologies (MAXR), the combined company has pulled one of the most aggressive accounting schemes Spruce Point has ever seen to inflate Non-IFRS earnings by 79%. However, with end markets weakening, and burdened by $3.7 billion of rising debt with almost no cash and free cash flow, Maxar must eliminate its dividend immediately, or risk wiping out equity holders.
CEO Howard Lance is a former Group COO/President of NCR, a successful Spruce Point campaign that fell 40% after we highlighted numerous accounting concerns, and it failed to find a buyer after a strategic process. He was also the Chairman of the Board at Change Healthcare Holdings through 2017 and Harris Stratex (Nasdaq: HSTX, now called Aviat Networks (AVNW)). Both companies blindsided investors when informing them that the financial statements could not be relied upon, and material weaknesses of controls existed
Engaging In A Massive M&A Accounting Scheme To Cover Past Problems: In Feb 2017, management said it didn’t identify any material inconsistencies in DigitalGlobe’s financials between GAAP and IFRS. It then backtracked and revised financials that artificially inflated revenues by 4-6% and EBITDA by double digits. However, this is only the tip of the iceberg. We previously illustrated our concern that MDA appeared to be overcapitalizing costs by inflating intangible asset purchases. Thus, it came as no surprise to us when Maxar used the DigitalGlobe acquisition to inflate intangible assets even further. However, the $1.1 billion inflation was an order of magnitude that shocked us. MDA made reference to DigitalGlobe’s “world leading (satellite) constellation” as a strategic rationale of the acquisition – yet it impaired the satellite assets at deal closing, and inflated its intangible asset accounts by a commensurate $1.1 billion
Numerous One-Time Gains Being Used, Some In A Non-Transparent Manner: It appears Maxar has accelerated recognition of investment tax credits, and amended its post-retirement benefit plan to book one-time gains. In the case of the benefit plan gain, Maxar booked a $24.6m gain in Q4’17 (flattering EBITDA by 13.5%), which was not fully disclosed across its investor communications, nor do we believe analysts have adjusted their models to account for it. As a result, we believe Maxar will have a large headwind in Q4’18 and disappoint
Deleveraging Plan Is A Fantasy And The Dividend Must Be Eliminated: Maxar is claiming it will deleverage and drive higher cash flow, but the numbers tell a different story: leverage is rising and it appears it is out of cash by reporting cash overdrafts! In addition to a large interest expense and capex burden (which we believe will remain at $300m+/yr as opposed to declining per management), Maxar is committed to a $68m/yr dividend and must pay down $25m/yr of its Term Loan B. These means it has no excess cash flow to accelerate debt reduction. Maxar is borrowing money to pay the dividend. Maxar should immediately cut or eliminate the dividend and direct capital towards debt reduction
Up To 100% Long-Term Downside On Normalized Financials: Maxar trades at 10.5x and 43x on our normalized 2018E Adj. EBITDA and EPS for a business we estimate is declining organically 12.7%, and dangerously levered 5.8x. Valued on its free cash flow, expected to produce $0-$50m, Maxar could be viewed as worthless. Using below industry average P/E and EBITDA multiples to reflect Maxar’s distressed state and specious financial statements, we estimate an intermediate trading range of $20.00-$25.00 per share (45%-55% downside)