Defense electronics suppler Mercury Systems [MRCY] on Wednesday said it has hired financial advisers to help explore a possible sale of the company, which has been under pressure from an activist investor group to look for a potential buyer.
The company said the strategic review was initiated by its board “to enhance shareholder value” and that it might not result in a sale.
In 2021, two firms that invest in undervalued companies, Jana Partners and Starboard Value, acquired minority stakes in Mercury. In 2022, Mercury agreed to appoint two members to its board under an agreement with the two investment firms.
Jefferies aerospace and defense analyst Sheila Kahyaoglu said in a client note that a managing partner with the global private equity firm Advent International on Wednesday suggested interest in Mercury. Advent’s portfolio includes Cobham, whose Cobham Advanced Electronic Solutions is “the only direct mid-tier competitor in radar components/electronics alongside MRCY,” she said.
Given close scrutiny by the Federal Trade Commission currently of vertical integration by large defense prime contractors through acquisitions, Kahyaoglu said offers by Lockheed Martin [LMT] and Raytheon Technologies [RTX], which each account for more than 20 percent of Mercury’s sales, are unlikely due to “regulatory issues and general interest.” She doesn’t see a fit with General Dynamics [GD] and Northrop Grumman [NOC] and believes L3Harris Technologies [LHX] has its hands full having just acquired the tactical data link business of ViaSat [VSAT] and has a deal pending for Aerojet Rocketdyne [AJRD].
Defense prime contractors based outside the U.S. that could potentially find a strategic fit with Mercury include BAE Systems and Italy’s Leonardo, although both supply to Mercury, Kahyaoglu said. She also suggested Ametek [AME] and Curtiss-Wright [CW] as potential buyers.
Mercury’s financial advisers for the strategic review are Citi and Goldman Sachs & Co.
Mercury announced the strategic review in conjunction with reporting its second quarter fiscal year 2023 financial results. The company swung to a $10.9 million, 19 cents earnings per share (EPS), net loss versus $2.9 million (5 cents EPS) in earnings a year ago. Sales increased 4 percent to $229.6 million from $220.4 million a year ago due to prior acquisitions.
For all of FY ’23, Mercury expects net income to range between $13.9 million and $24.8 million, up between 23 and 120 percent over FY ’22. Sales are forecast to be between $1 billion and $1.1 billion, up 2 to 6 percent over FY ’22.