Telcordia D-Day Approaches
The deal, announced November 18, was originally due to close within 60 days (around mid-January), with CEO Matt Desch heralding a new, acquisitive era (see SAIC Sells Telcordia and Telcordia Craves M&A Warchest).
That timeframe then moved back, with Telcordia's current owner, Science Applications International Corp. (SAIC), noting in a Securities and Exchange Commission (SEC) filing that the transaction should conclude in its current first fiscal quarter, which runs to the end of April 2005. And last Monday, Desch resigned from the SAIC board with immediate effect "prior to the closing of the sale of Telcordia," the firm noted in another SEC filing.
A source close to the deal says Telcordia's ownership is set to transfer from SAIC to TTI Holding Corp., the buyout firms' joint venture, some time this week.
But it seems the acquisition process may have faltered along the way, as the Financial Times today reported that Providence Equity and Warburg Pincus last week postponed (at least temporarily) the issue of the bonds that will raise $970 million towards the cash deal.
That postponement coincided with a revised outlook on Telcordia's debt rating status from Moody's Investors Service, which late last week downgraded its outlook from Stable to Negative. Moody's cited a reduction in near-term revenue and profit expectations, "and expected resulting elevation in leverage levels above 5.0 times debt to EBITDA."
Moody's says its outlook change "reflects heightened uncertainty in the company's ability to offset declines in its legacy RBOC operations systems support (OSS) software business with sales of next generation software to RBOCs and other tier 1 carriers and with new software offerings for cable and wireless providers. Moody's believes that ongoing consolidation and cost reductions in these markets will result in fewer, but potentially larger, software and service contracts. As a result, timing of contract awards and revenue conversion from backlog is likely to introduce greater volatility into revenue and earnings streams."
Those are basically the same market conditions that have been hitting Telcordia's revenues for a few years now. According to SAIC's recent SEC filing related to the sale, Telcordia recorded revenues of $1.4 billion in its fiscal year ended January 31, 2002. Two years later, its revenues had fallen to $887 million. SAIC's latest financial data, for the nine months ended October 31, 2004, showed revenues from the Telcordia business of $642 million for that period.
But the timing and lumpiness of major RBOC deals will be even harder to predict at present, given the flurry of acquisition activity (see Battle for MCI Heads to the Wire and SBC to Buy AT&T for $16B).
Moody's has made note of the potential for more changes due to service provider consolidation. And given that Telcordia's signaled a new era of acquisitions, that could dent the firm's credit outlook further.
"Given the company's desire to grow its wireless and cable software offerings amidst rationalization of R&D spending, Moody's expects Telcordia to pursue 'fill-in' acquisitions, which could have a negative impact on leverage and liquidity," notes the ratings agency.
SAIC's public affairs staff weren't answering the phones today, while a Telcordia representative says only that the company hasn't issued any statements since the acquisition was announced last November. The buyout firms hadn't responded to requests for comment as this article was published.
SAIC certainly won't want the price to head south: It stands to bank just $643 million from the $1.35 billion after costs and taxes are deducted. And that figure could go down if Telcordia loses its long-standing legal battle with South African carrier Telkom SA Ltd., as SAIC has pledged to cover any damages relating from that ongoing case (see Telcordia Leaves Legal Luggage). — Ray Le Maistre, International News Editor, Light Reading