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Remec Sell-Off of Units Continues

Sales and mergers are common, but the selling of an entire company in pieces and then distributing profits to shareholders is a rare occurrence.

Del Mar-based Remec Inc. is doing just that, having completed the first stage May 20 when it officially transferred ownership of its defense and space unit to Chelton Microwave, a wholly owned subsidiary of Cobham, Plc., a publicly traded British aerospace and defense company with more than $1.5 billion in sales and about 8,000 employees.

Remec has pursued a liquidation path after years of losing money, primarily in its wireless systems unit, which it launched in the mid-1990s to diversify its revenues from its core business of defense contracting.

Founded in 1983, Remec makes microwave equipment used in communications networks. It is a subcontractor to the nation’s largest prime defense companies, including Northrop Grumman, Boeing, and Lockheed Martin.

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The foray into commercial wireless proved to be a financial drain and ultimately led to the company’s decision to liquidate, said Mark Jordan, vice president for A.G. Edwards & Son, a St. Louis-based brokerage.

“In hindsight, had they stuck to their knitting and didn’t go into the commercial space, they would have been all right,” Jordan said. “That decision was a disaster. The losses they sustained in that unit were such that it forced them into liquidation.”

After several years of restructuring its operations and moving most of its manufacturing to such low-cost labor nations as the Philippines, Costa Rica and China, Remec directors decided last year that they’d had enough. Longtime Chief Executive Officer Ron Ragland resigned and was replaced by Tom Waechter, who began the company sell-off, at first with smaller units.

In December, the company agreed to a $260 million sale of its defense and space unit to Chelton. In March, it agreed to sell its wireless unit, which did about $324 million in sales last year, to Powerwave Technologies of Santa Ana in a deal then valued at about $118 million.

The decision to sell the firm in parts was driven by the fact that the two main operations were in such dissimilar industries, Jordan said. To get the best price for shareholders, it had to sell them separately, the company decided.

Calls to Waechter and other top Remec executives for interviews on the transactions were not returned. Chief counsel Don Wilkins provided limited information.

“We are selling off our business units and winding down the company,” Wilkins said. “Our strategy ultimately is to sell off the assets and distribute the proceeds to shareholders.”

Once the Powerwave transaction is completed, Remec will have two remaining units , one that does contract manufacturing with about $55 million in annual revenues, the other that makes outdoor microwave radios with about $20 million in revenues.

“We’re in discussions to sell both of those units, and we anticipate selling both of them about the same time frame (as the Powerwave sale),” Wilkins said.

Wilkins was reluctant to say when the entire Remec liquidation process would be complete, saying there are “too many moving parts.”

“When and ultimately how much is paid out to shareholders still hasn’t been determined,” he said.

While Remec’s 1,100 defense employees have a new owner, they won’t see many other changes, said Dave Gaggin, the CEO of Bolton, Mass.-based Chelton Microwave.

“We’re going to leave everybody where they are and will try to build the company up and get more business in there,” Gaggin said.

Asked to be more specific, he expects the unit to grow its employment by an average of 10 percent to 15 percent annually.

“By combining their operations with some of our other divisions, we can win more business,” he said.

Chelton got its deal rolling in March 2004 when it contacted Remec about a possible business transaction. In subsequent meetings with Remec executives, Chelton told Remec it wanted to buy the company, according to documents filed by Remec with the Securities and Exchange Commission.

“We’ve known of Remec for a long time,” Gaggin said. “It has a very strong position with a number of U.S. military platforms. Their product line is very complementary to ours.”

The electronic microwave components made by Remec’s defense and space unit are used in many military weapons programs, including jet fighters such as the Air Force’s F-16 and the Navy’s F/A-18; Longbow missiles; as well as global positioning, and military and communication satellites, according to Remec’s SEC documents.

For Remec’s previous fiscal year that ended Jan. 31, the defense unit generated $100 million in sales, or about a third of the company’s total revenues.


The Best Offer

Chelton’s offer spurred Remec’s board of directors to hire two financial advisory firms in October to ascertain the company’s fair market value and contact others interested in a possible acquisition. In a process involving nine companies, Chelton’s bid was determined as best for shareholders by the Remec board, according to the company’s proxy statement on the transaction.

On Dec. 20, the companies signed a definitive agreement to sell the unit.

Remec’s defense and space division was well regarded and captured an above-average price from Chelton, Jordan said.

Chelton paid about 2 & #733; times Remec defense’s annual revenues, while the average was about twice a firm’s annual revenues for similar defense companies, he said. In contrast, Remec’s wireless systems price represented only about half of that unit’s annual revenues, compared with the average price for similar wireless companies of a full year’s annual revenues, Jordan said.

Chelton’s acquisition follows a trend within the defense industry of large foreign defense contractors buying up smaller U.S. based manufacturers to gain both specialized technology and a foothold in the U.S. defense market, said industry analyst Brad Curran, of Frost & Sullivan, a Palo Alto based research firm.

“There was more than 100 mergers and acquisitions within the federal information technology defense sector last year,” Curran said.

Last week, following the formal completion of the defense and space unit sale to Chelton, Remec took $177 million of the cash and distributed it to shareholders according to a prearranged formula. Each share of Remec received a fractional share of the newly reconstituted Remec (without the defense unit) equaling 0.446 of common stock, plus $2.80 in cash.


Making Payments

After the Powerwave sale, which should be completed by the end of July, shareholders will receive payments based upon the exact liquidation value and Powerwave’s stock price. The deal arranged in March calls for a cash payment of $40 million plus 10 million shares of Powerwave’s Nasdaq-traded stock. The total price equaled about $130 million as of May 24.

Jordan of Edwards & Sons estimated that when Remec finishes selling off all of its units and liquidates itself, Remec stockholders should receive about $6 for each share owned.

That price is well above what Remec shares have been trading for a long time. To expect to garner anything more, the company would have to turn around its money-losing wireless unit, which seems unlikely in the current competitive marketplace, he said.

Wilkins said since Chelton managers have taken over operations at Remec defense and space, employee reaction has been positive.

In addition to the main Kearny Mesa plant, the unit also includes a Tijuana maquiladora with about 100 employees and an engineering office in Texas with about 20 employees.

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