MAXR - Maxar: Low Merger Spread Implies Little Upside Left Sell And Redeploy

Summary

• Maxar Technologies Inc. is a leader in satellite imagery and space infrastructure.
• The company announced a transaction to sell itself to Advent International, a PE investor, for $6.4 billion or $53 / share.
• Merger arb spread imply little upside left in Maxar Technologies Inc. shares. Investors may want to consider selling ahead of the deal completion and redeploy capital elsewhere.

A few months ago, I wrote a bullish article on Maxar Technologies Inc. ( MAXR ), noting the significant upside in Maxar's shares if and when its next generation " Worldview Legion" satellites get launched.

Apparently, I was not the only one who saw the significant value in Maxar's satellite imagery business, as well as its satellite design and launch capabilities. On December 16th, 2022, Maxar announced it had struck an agreement to be acquired by Advent International for $6.4 billion.

Maxar Selling To Private Equity

Under the terms of the agreement, Maxar would be acquired by Advent International ("Advent") in an all-cash transaction valuing Maxar at an enterprise value of $6.4 billion or $53.00 per share in cash, a 135% premium to Maxar's stock price on December 15, 2022.

Advent is a leading global private equity investor headquartered in the U.S. with $89 billion in assets under management. Importantly, after the transaction, Maxar will remain a U.S.-controlled company. Furthermore, Advent is well known to North American regulators, having deployed $28 billion across the defense, security and cybersecurity sectors in the last three years. Therefore, for investors of Maxar, the Advent transaction looks like a pretty safe bet to go through.

Under the terms of the transaction agreement, Maxar has a 60-day "go shop" period that will expire on February 14, 2023. If management can solicit a superior merger proposal prior to February 14th, Maxar has the right the terminate the sales agreement to Advent for a termination fee of $51.9 million. After the "go shop" period, the termination fee rises to $124.5 million. On the other hand, if Advent cannot complete the transaction for whatever reason, Maxar is entitled to a termination fee of $249 million.

Stock Price Implying No Superior Bid

According to the transaction press release, Maxar and Advent expect the transaction to be completed in mid-2023, pending regulatory approvals. Based on a current price of $51.30, Maxar is trading at a 3.2% discount to the $53 cash bid. I estimate the market is implying a 98% likelihood of the transaction completing with Advent (Figure 1).

Furthermore, with Maxar's stock price never trading above the $53 deal price, I believe there is very little expectation of a superior deal emerging before the expiration of the "go shop" period (Figure 2).

Investors Should Look To Tender

For investors who followed my recommendation and bought shares of Maxar, I believe the best course of action is to sell their shares now and look to redeploy elsewhere, as the merger arbitrage spread is not attractive. Holding the shares now until deal is completed mid-2023 will only yield 3.2% for ~6 months, or 6.5% annualized, versus over 4.85% annualized yield that can be obtained on 6 month treasury bills.

Where To Redeploy?

For investors looking to stay within the Aerospace industry, I think an interesting place to redeploy capital is in Rolls-Royce Holdings plc ( RYCEF ). I wrote a recent article on Rolls-Royce detailing my bullish view.

Essentially, Rolls-Royce is a play on the re-opening of the Chinese economy. Rolls-Royce's civil aerospace business was severely curtailed by the COVID-19 pandemic as air-flights were drastically curtailed. Rolls-Royce's engine maintenance business bills airlines based on "Engine Flight Hours" ("EFH"). With less flights in the air, Rolls-Royce saw dramatically less revenue.

However, as Chinese travelers return to the skies post the reopening of their economy, I believe there is significant upside in Rolls-Royce shares as EFH normalizes in the coming quarters.

Conclusion

Maxar agreed to sell itself to Advent International, a private equity investor. Maxar's share price implies a high probability of the transaction going through without a superior bid. I recommend investors sell their shares of Maxar and look to redeploy elsewhere.

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