NEW YORK, July 7 /PRNewswire/ -- Ramius Value and
Opportunity Master Fund Ltd, a subsidiary of Ramius LLC
(collectively, "Ramius"), today reported a 6.2% ownership stake in
Aviat Networks, Inc. ("Aviat" or the "Company") (Nasdaq: AVNW).
Ramius also announced that it delivered a letter to Chairman
and CEO Charles Kissner stating its
belief that the Company is deeply undervalued and that significant
opportunities exist to improve the operating performance based on
actions within the control of management and the Board.
The full text of the letter follows:
Dear Chuck:
As reported this morning in a 13D filing with the Securities and
Exchange Commission, Ramius Value and Opportunity Advisors LLC, a
subsidiary of Ramius LLC, and certain of its affiliates
(collectively, "Ramius") owns approximately 6.2% of the shares
outstanding of Aviat Networks Inc. ("Aviat" or the "Company"),
making us one of the Company's largest shareholders. As we
have outlined below, we believe that Aviat is deeply undervalued
and significant opportunities exist to improve the operating
performance of the Company based on actions within the control of
management and the Board of Directors (the "Board"). Over the
past several months, we have had in-depth discussions with the
Company's former Chief Executive Officer, Harald Braun, as well as the Company's Chief
Financial Officer, Tom Cronan,
regarding our concerns about the deteriorating financial
performance of the Company and the lack of action to adjust
operating expenses in-line with the Company's current business
prospects. We look forward to continuing these discussions
with you and expect that swift actions will be taken to address
these concerns and unlock shareholder value.
At the current time, the public market is attributing almost no
value for the operating business at Aviat. As depicted in the
table below, the Company ended the last quarter with approximately
$390 million of current assets
including assets such as cash and cash equivalents, accounts
receivables, and inventory. After subtracting the
total liabilities of the Company from this amount, the
Company is left with nearly $200
million of net current assets, or $3.35 per share. We believe this
methodology provides for a fair assessment of the potential
liquidation value of the Company's balance sheet. The current
stock price of $3.46 represents a
mere 3.3% premium to this value clearly indicating that the public
market is attributing essentially no value for the Company's
operating business. This analysis does not even take into account
the value of Aviat's long-term assets of $61
million, or $1.02 per share,
which, when added to net current assets of $3.35 per share, equates to tangible book value
of $4.37 per share.
Current Assets / Total Liability Analysis
($'s in millions,
except per share values)
Cash and Cash Equivalents $140.5
Accounts Receivable $115.2
Inventories $70.8
Other Current Assets $63.1
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Total Current Assets $389.6
Total Liabilities $189.7
Total Current Assets less Total Liabilities $199.9
Shares Outstanding 59.68
Per Share $3.35
Current Share Price $3.46
Difference - % 3.3%
* Per April 2, 2010 10-Q, market data as of July 6, 2010.
We believe the current market price reflects a lack of
confidence in the business strategy at Aviat. Over the past
two years since FY 2008, revenues have declined by over
$200 million. Yet, as shown in
the table below, operating expenses have actually increased over
the period by approximately $3
million. This has resulted in nearly a 70% decline in
Adjusted EBITDA in just the past two years.
2008 vs. LTM Performance ($'s in millions)
2008 LTM Change - $ Change - %
Revenue $718.4 $497.8 ($220.6) -30.7%
R&D* $44.7 $41.2 ($3.5) -7.8%
6.2% 8.3%
SG&A* $123.9 $130.1 $6.2 5.0%
17.2% 26.1%
Total Operating Expenses* $168.6 $171.3 $2.7 1.6%
23.5% 34.4%
Adjusted EBITDA* $66.7 $20.6 ($46.1) -69.1%
9.3% 4.1%
* Adjusted for one-time charges and stock-based compensation, per Ramius
estimates.
Aviat has taken little action, to date, to adjust the cost
structure in-line with current business prospects. In fact,
the Company has publicly stated that the current cost structure is
designed to achieve a target operating margin of 10% only if
quarterly revenues reach $150
million. For each of the past three quarters, revenues
have been approximately $120 million
and revenue guidance for 4Q 2010 is in a range of $120 million to $130 million.
Based on our research and analysis, we believe a significant
opportunity exists to adjust the cost structure of Aviat to achieve
acceptable operating margins even at the current revenue run rate.
This can be achieved by re-focusing the Company on its core
wireless backhaul and private network businesses and de-emphasizing
growth investments in non-core product lines such as WiMAX.
Our estimates indicate that the Company is currently spending
between $15 million and $20 million
per year on the WiMAX initiative. To date, the Company has
recognized negligible revenues from this business making it a
substantial drain on Company resources.
Additionally, the Company has made substantial investments in
sales and marketing and research and development to drive
penetration into new geographic markets. We believe the
Company should focus its resources on markets where it has
substantial penetration, a large installed base, and a stable
pricing environment. In other non-core markets the Company
should look for opportunities to utilize distribution partners or
exit.
Even if you assume that the Company can only reach 50% to 75% of
its target operating margin of 10% due to lower revenue levels and
less absorption of overhead costs, the results still imply that
Aviat is significantly undervalued. As demonstrated in the
table below, at an annualized revenue run rate of $120 million per quarter and a 5.0% to 7.5%
operating margin, Aviat would be trading at an Enterprise Value /
EBITDA multiple of between 1.3x and 1.6x. The two closest
public competitors, Ceragon Networks Ltd. (CRNT) and DragonWave
Inc. (DRWI), currently trade at Enterprise Value / forward EBITDA
multiples of 6.5x and 3.5x, respectively.
Pro Forma EBITDA / Valuation Summary ($'s in millions)
Last Quarter Revenue $120.0 $120.0
Multiplier x 4.0 x 4.0
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Annualized Run Rate $480.0 $480.0
Target Operating Margin x 5.0% x 7.5%
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Pro Forma Operating Income $24.0 $36.0
Last Quarter Adjusted D&A $6.0 $6.0
Multiplier x 4.0 x 4.0
------- ------
Annualized Run Rate $24.0 $24.0
Pro Forma EBITDA $48.0 $60.0
Current Market Capitalization $206.6 $206.6
Less: Cash and Cash Equivalents ($140.5) ($140.5)
Plus: Total Debt $10.0 $10.0
------- ------
Enterprise Value $76.1 $76.1
Implied Enterprise Value / EBITDA 1.6x 1.3x
* As of July 6, 2010. Target Operating Margin represents 50% - 75% of
Company stated target.
We believe this analysis clearly demonstrates that with prudent
cost management, Aviat has the potential to generate substantial
earnings and cash flow implying an extremely low valuation both on
an absolute basis and relative to its peers. To that end, we
urge management and the Board to focus its attention on driving
cost improvements by re-focusing on the Company's core businesses.
We greatly appreciate the time that Mr. Braun and Mr. Cronan
have spent with us over the past several months and look forward to
having an active and productive dialogue with you going forward.
As one of the largest shareholders of Aviat, we have a strong
vested interest in the performance of the Company and hope to work
constructively with management and the Board to unlock value for
all shareholders.
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Best
Regards,
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Peter A.
Feld
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Jeffrey C.
Smith
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Ramius LLC
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Ramius LLC
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About Ramius LLC
Ramius LLC is a registered investment advisor that manages
assets in a variety of alternative investment strategies. Ramius
LLC is headquartered in New York
with offices located in London,
Luxembourg, Tokyo, Hong
Kong and Munich.
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Media
Contact:
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Peter Feld / Ramius
LLC / (212) 201-4878
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Gavin Molinelli /
Ramius LLC / (212) 201-4828
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SOURCE Ramius LLC