‘Bad optics’ aside, Mitel analysts give thumbs-up to mobile division sale

Mitel shares plunged Tuesday morning, the day after the Kanata telecom company said it was divesting its mobile division, but analysts say a simplified Mitel is well-positioned for growth and future acquisitions.

Mitel said yesterday that it was selling its mobile division, which it launched less than two years ago through its acquisition of Mavenir Systems, to pay down debts and focus on the expansion of its cloud-based and traditional enterprise business.

Analysts said they were surprised, but not turned off of the stock.

Richard Tse, an analyst with National Bank Financial Markets, said in a research note to clients that there are “bad optics” surrounding the deal. He noted Mitel acquired the division for $560 million in 2015 with hopes of scaling up, but is divesting it at a loss for $385 million plus equity.

However, Mr. Tse went on to say that the deal “simplifies the story” for the Ottawa tech firm.

Mitel was faced with the need to invest in both its cloud and mobile verticals in 2017, but with 5G on the horizon and a lack of returns in shareholder value on its mobile investment to date, the capital required to scale up its mobile market presence wouldn’t have yielded the returns the company was seeking, the analyst wrote.

On the other hand, the company’s pivot to cloud-based – rather than on-premise – communications has resulted in extensive growth. Revenues from the cloud led the company to exceed its second-quarter earnings guidance, Mitel reported in August.

Analyst Barry McCarver of Stephens Inc. also likes the move, writing in a report that revenues from mobile were “unpredictable” and that the divestiture will lead to a significant reduction in leverage, freeing up significant cash flow.

Both analysts believe Mitel will be a strong M&A suitor moving forward. Mr. McCarver believes Mitel will make an acquisition in near future, but that the company’s leadership will “remain disciplined” in executing what he considers a successful consolidation strategy.

However, not all analysts were completely comfortable with the transaction.

RBC Capital Markets downgraded Mitel shares due in part to difficulty predicting its capital allocation strategy, the Financial Post reported.

On the stock market, Mitel (TSX:MNW)(NASDAQ:MITL) shares initially rose Monday morning before steadily declining.

Earlier today, its stock price plunged more than seven per cent at the opening bell on the Toronto Stock Exchange before regaining some of its lost ground.

In late afternoon trading Tuesday, Mitel shares were hovering at $8.97. That’s down 4.6 per cent on the day and down 10.3 per cent on the week.

Mitel executives were unavailable for interviews on Tuesday.