A Deal With RADA-cal Upside
Updated: Jul 7, 2022
In our June 15th blog post on buyouts, we outlined multiple stocks that GROW Funds owned when purchased. Rada Electronics (RADA) can now be added to the list. On June 21st RADA agreed to an all-stock merger with Leonardo DRS.
Rada Electronics is a defense technology company. They produce defense electronics solutions for military vehicles and aircraft. This company is uniquely positioned as a direct beneficiary of increased defense spending in the U.S. and globally.
RADA has unique radar capabilities to detect and defend against low flying threats such as drones and cruise missiles. As we witnessed in the Ukraine situation, many Russian Tanks were destroyed. We believe that the U.S. and European Allies will be spending more on these types of radars to protect both mobile and stationary defense systems. Tactical radars were listed as the main reason Leonardo DRS chose to merge with RADA, a capability they don’t currently hold and would take years to develop independently.
DRS was purchased in 2008 by Leonardo, and Italian company. The details of the current merger read that RADA shareholders will own 19.5% of the combined entity with DRS Leonardo DRS retaining 80.5% of the company. Management noted that the deal will “provide a premium in excess of 20%” for shareholders. Since the time of this announcement the stock has traded lower due to uncertainty and unknown information regarding the details of the deal.
The companies hosted a conference call to help investors understand the deal structure more clearly. Combined, the companies plan to generate $369 million in EBITDA by 2023. In comparison, other companies in the defense technology sector trade for EBITDA multiples between 11 times and 15 times. Applying these same multiples to the 2022 EBITDA estimate results in a share price between $14 and $20 for RADA. With shares trading under $11 at the time of writing we believe there is significant room for upside. Management stated they plan the deal to close during the fourth quarter of this year. We continue to hold RADA stock in our client portfolios.
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Earlier today, RADA announced their expectations for the merger price of between $14.33 and $16.77 congruent with our internal belief that there is substantial upside potential for the stock. This furthers our confidence as we continue to hold the stock in our client portfolios.