(By Balaseshan) CIBC World Markets Inc. analyst Stephanie Price downgraded rating of Macdonald Dettwiler & Associates Ltd. (TSE:MDA) to "Sector Performer" from "Sector Outperformer" and lowered price target to $54.50 from $66.
The brokerage reduced its 2012 EPS estimate for the surveillance and satellite imaging company to $3.64 from $4.43 and its 2013 estimate to $5.99 from $6.22.
MDA announced on Wednesday that it received a request for additional information from the U.S. Department of Justice (DOJ) regarding its potential acquisition of Space Systems/Loral Inc. (SS/L). Second requests from the DOJ under HSR Act are rare, about 2% of transactions reported, with about 60% of requests resulting in challenges by the DOJ.
Price assumed that the DOJ is focused on MDA's antenna business, given its market share (about 25%) and expects that the DOJ is concerned about pricing/supply post SS/L. She expects the likely outcome is the division's divestiture (about $100 million in revenue) or a contractual agreement on pricing.
The analyst believes that the secondary request could lead to significant delays. On average, secondary requests under HSR take 8 to 20 weeks to complete and cost an average of $5 million to $10 million. As a result, she is now expecting the close to occur in Q1-2013 (versus prior late Q3/early Q4-2012).
Given increased deal risk, Price applies probability weighting of 40% to the SS/L business in her valuation, reducing her price target, and downgrades her rating. She continues to view MDA's core business as solid and expects upside if the SS/L transaction closes.
MDA is trading down 0.10% at $50.60 on Friday.