MDA future dim after space division sale blocked, analysts say

By: Brenda Bouw, THE CANADIAN PRESS

VANCOUVER - Ottawa's confirmation it will block the $1.3-billion sale of MacDonald Dettwiler and Associates Ltd.'s (TSX:MDA) space division, coupled with a slowdown in the real estate sector where the company concentrates its other business, spells tough times ahead for the Vancouver-based firm, analysts say.

Some have slapped a "sell" rating on the stock, believing MDA's future has dimmed, while others said the company has a strong balance sheet and will simply have to tread water until it can update its business plan.

MDA said in a statement Friday it will forge ahead with plans to grow both the now-unsold space division as well as its information products business, which provides data and documentation for the North American and U.K. real-estate sectors.

"MDA will continue with its baseline long-term business plan of growing its business and delivering shareholder return," the company said.

However, analysts say a slowdown in the U.K. housing market, where the company sells government-mandated Home Information Packs, known as HIPs, spells more bad news for the company.

As well, with the political tide in the U.K. turning back to the Conservative Party - which has pledged the cancellation of the HIPs program if they return to power - some believe MDA could be hit with another political storm down the road.

"With the $1.3-billion asset sale dead... potential unusual losses to report, HIPs implementation delays or worse, we see no reason to own the stock," Richard Stoneman, an analyst with Dundee Securities wrote in a note to clients Friday.

Stoneman has a "sell" rating on the stock with a 12-month target of $43.

Scotia Capital analyst Paul Steep said MDA is "facing several near-term headwinds."

"We believe the rejection of the sale ... has significantly diminished the firm's financial ability to aggressively pursue (information products group) growth. In addition, the U.K. housing market continues to show signs of weakness," Steep said in a note to clients.

"A key question for MDA will be potential strategies to monetize the information systems (space) division as it seeks to focus on the growth prospects in the information products group."

Steep has a 12-month target of $42 on the stock.

On Friday, MDA shares fell 3.5 per cent or $1.46 to $40.15 on the Toronto Stock Exchange. The shares plummeted more than eight per cent last month after Ottawa warned it might block the deal, and have been dropping since.

Industry Minister Jim Prentice confirmed Friday the government's preliminary decision to block the sale of MDA's space division, which includes the Radarsat satellite, saying the proposed deal would not benefit the country.

MDA was planning to sell its information systems and geospatial services branch to Alliant Techsystems Inc. (NYSE: ATK), a U.S.-based munitions and rocket components maker, for $1.3 billion in cash.

Its plan was to use the money to "focus exclusively on expanding its faster growing and more scalable" information products business.

What's more, MDA argued the sale would give its space division access to U.S. defence contracts not typically available to foreign companies.

For its part, ATK was interested in gaining access to a pool of highly skilled employees in areas such as robotics.

ATK said Friday it will take a US$3.9-million after-tax charge, or 11 cents per share, in its fourth quarter as a result of the cancelled deal.

On Thursday, the company reported fourth-quarter profit rose 19 per cent to US$64 million and sales increased 12 per cent to $1.1 billion. The results don't include the charge for the nixed MDA deal.

"While ATK is disappointed that the MDA acquisition did not close, the company will continue pursuing a disciplined capital deployment strategy that includes strategic acquisitions, debt repayment and share repurchases," ATK stated.

MDA is scheduled to release its first-quarter earnings on Monday and is expected to announce a charge for the killed deal.

"In our view the cancellation of the sale... will lead to a substantial writedown when Q1 results are released next week," Stoneman wrote.

"As well, we anticipate writedowns to right-size that division with several existing space programs winding down (Shuttle, Radarsat, Dextre.)"

Other analysts speculated on the company's future, saying splitting the company into two parts wouldn't make sense now the that space division has been orphaned, because it will have little value.

Some scoffed at the political interference that they believed killed the deal in the first place.

"I'm furious," said one analyst. "The hope was they could use the money from the sale to boost the other businesses. Now that's changed."

Magued Iskander, executive vice-president and general manager of information systems at MDA in Brampton, Ont. said he and his colleagues are "disappointed" the deal didn't happen.

"We thought as management, as employees, as shareholders even our industrial partners thought this was very beneficial for MDA and the sector as a whole," he said in an interview.

"MDA is the largest space company in Canada and if it is good for MDA, how come it is not of net benefit to Canada? So there is a breakdown in communication and understanding there. It's disappointing."

On the bright side, he said the debate around the ATK deal has renewed the government's focus on the importance of the space program.

"I think the space file has been neglected over the years at the political level and I think that brought it into the light that this is a strategic sector," Iskander said.

"I hope we will embark on space program like we had in previous decades that made Canada the leader in many areas."

Ottawa announced Friday the renewal of a $109-million four-year contract between the MDA and the Canadian Space Agency.

Iskander said the contract for the division, which has annual revenues of about $350 million, was expected and has not yet been signed.