Spruce Point Capital Management Releases a Strong Sell Forensic Research Opinion on Maxar Technologies Ltd. (NYSE / TSX: MAXR)
NEW YORK, Aug. 7, 2018 /PRNewswire/ -- Report entitled "Falling Out of Orbit to Zero" outlines how Maxar faces up to 100% downside risk, as a result of financial strains and a brazen accounting scheme to mask failures from its levered acquisitions of Space Systems Loral (SSL) in 2012 and DigitalGlobe (DGI) in 2017.
- Poorly Timed And Executed Levered Acquisitions With No Free Cash Flow: SSL was acquired in 2012 when demand for geostationary satellites was robust. Industry demand and backlog has dried up as orders decline as a result of new high-throughput satellites and low-earth-orbit (LEO) constellations coming online. In our opinion, Maxar acquired DGI in 2017 from a position of weakness, increasing its total adjusted debt burden to $3.7 billion. Now failing to hit its financial targets, Maxar is projected to generate between $0-$50 million of free cash flow in 2018. Cash overdrafts have been reported as a result of cash shortages
- Earnings Overstatement Through Billion Dollar Intangible Asset Inflation: Prior to its acquisition of DGI, Maxar aggressively capitalized intangible assets as capital expenditures, well beyond peer practices, leading to $50m of annual earnings overstatement in our opinion. Faced with growing problems, we believe it used creative merger accounting to impair $1.1 billion of DGI's satellites, and inflate acquired intangibles by a commensurate amount. Maxar's Non-IFRS earnings now conveniently eliminate "acquired intangible expense" – expenses it would have otherwise had to depreciate. Maxar leads analysts and investors to believe it can produce $4.81 per share of earnings and $718m of Adj. EBITDA by using a variety of aggressive accounting maneuvers. We estimate true earnings and EBITDA are overstated by approximately 79% and 17%, respectively
- Dividend At Risk of Cut or Elimination As Covenant Breach Approaches: Maxar has told investors it intends to deleverage quickly, but is already behind targets, and was downgraded by Moodys to B1/stable in June 2018. We estimate Adjusted Debt / EBITDA is 5.8x, above its 5.5x covenant. Maxar's $207m and $300m of annual interest expense and capital expenditures leave little room for its $68m per year dividend. Maxar will have to burn cash or increase borrowings to fund the dividend.
- CEO's Obscured Leadership Roles At Various Companies Requiring Financial Restatement: Maxar's CEO Howard Lance obscures from his biography his role as the Chairman of the Board at Change Healthcare, and as Director of Harris Stratex. Under Lance's tenure, both companies informed investors their financial statements could not be relied upon, and material weaknesses of financial controls existed. In addition, Lance's biography has at times embellished his role at NCR Corp as President/COO, whereas his COO role was limited to the Financial and Retail Groups, and not the entire company. Lance and the rest of Maxar's insiders have limited alignment with shareholders, and beneficially own just 0.5% of Maxar's shares.
- Up To 100% Downside On Normalized Financials: Maxar trades at 10.5x and 43x on our normalized 2018E Adj. EBITDA and EPS for a business we estimate has declining organic revenues of -12.7%, and is dangerously levered 5.8x. Valued on its free cash flow, expected to produce $0-$50m this year, Maxar could be viewed as effectively worthless. Using below industry average P/E and EBITDA multiples to reflect Maxar's distressed state and speciously constructed financials, we estimate an intermediate price target range of $20-$25 per share.
The research report can be found on our website at www.sprucepointcap.com and updates will be posted on twitter @sprucepointcap.
Spruce Point Capital has a short position in Maxar Technologies, Ltd (MAXR) and stands to benefit if its share price falls.
About Spruce Point Capital
Spruce Point Capital Management, LLC, is a forensic fundamentally-oriented investment manager that focuses on short-selling, value and special situation investment opportunities.
