Sierra Wireless mulls buying Telit for low-power module consolidation

Sources in London’s financial district are muttering about Sierra Wireless considering merging with Telit, a move that would create a united company with revenues of over £1bn ($1.3bn). Such a move, should it transpire, could help the two better compete against rivals, and it might help Telit shrug some of the tarnish from the disgraced former CEO Oozi Cats affair.

The story comes from The Mail on Sunday, a sister to the Daily Mail, and cites “City (of London) sources.” It has received very little traction elsewhere, but nonetheless, deserves some examination. The two rivals’ potential consolidation would continue a trend in the IoT, most prevalent in the semiconductor industry.

Sierra Wireless, a Canadian firm, would be buying Telit out of London’s AIM market. Since the Cats revelation, Telit offloaded its automotive products to TUS, a Chinese firm, for £81mn, but it also transpires that some of the largest shareholders in the firm are calling a general meeting to replace current CEO Yosi Fait, the former finance director, and Telit’s independent director, Simon Duffy.

The revelation that former CEO Cats was a fugitive in a 1992 wire fraud case in Boston caused Telit’s share price to plummet. It transpired that Oozi Cats was the ‘Uzi Katz’ that had been indicted as a fugitive defendant in the 1992 case, which Italian outlet il Fatto Quotidiano unearthed when it was investigating funding awarded to Telit by the Italian government.

Before the news broke, Telit’s shares were worth £281, somewhat down from a peak £354 in May 2017. After the news came out, Telit’s shares dropped to a low of £1.13 on August 2017. Since then, it has peaked at £1.99 in September 2017, before leveling out at around the £1.60 mark – less than half of its twelve-month high in May.

At the time of the crash, Telit’s most recent results had disappointed the investment community – $6.7m loss for H1 2017, compared to 2016 profit of $4.7m, leading to a 40% post-results dip. However, it seems very unlikely that such disappointment would have decreased the share price as much as the controversy has. As such, Sierra Wireless could be getting quite the bargain. Telit’s current market cap is around £209mn, and not long before the controversy, it was being valued at around £500mn.

So perhaps Sierra Wireless is being purely opportunistic – buying up a customer list that it can turn into some healthy profits, thanks to the misfortune of a chief rival. We track both companies’ performance in the Riot 50 database, and Sierra has had its own share of misfortune.

Sierra Wireless currently trades at around $19.65 on the NASDAQ, up a good $3 following its quarterly figures published in July. However, that’s significantly down from a peak of $29.85 in July 2017, which in turn was a strong recovery from a five-year low of $10.93 in February 2016.

Today’s trading price is still miles away from its five-year high of $47.89, in December 2014, but it’s most recent full year results show revenue of $692.1mn (up 12.4% on 2016), gross margin of 33.9%, with net earnings of $4.1mn (down from $15.4mn in 2016).

With a market cap of $787mn, Sierra would become a billion-dollar company (again) with the purchase of Telit. This would be one of a number of acquisitions made by Sierra Wireless: Wireless Maingate (2014), Accel Networks (2015), MobiquiThings (2015), Numerex (2017), and Global Top’s GNSS assets (2017).

It seems that Sierra Wireless has the cash to acquire Telit, should it want to. There’s been no comment from either party, which can be read as an admission of interest, given that so many firms quite quickly deny these things if they are baseless.

For some additional context, recent analyst reports suggest that Chinese rivals are catching up with traditional leaders Gemalto (now owned by Thales), Sierra Wireless, and Telit. Strategy Analytics reports that SimCom took the number-one spot in the cellular IoT module market for 2017, leap-frogging the previous three leaders. SimCom’s success is due largely to big contracts in Chinese bike-sharing projects, according to the figures.

Separately, CounterPoint said SimCom had 23% of the H1 2017 shipments, with Sierra in second place on 17%, Telit in third on 11%, Gemalto in fourth on 9%, and u-blox in fifth with 5% – the ‘Others’ segment accounted for 35%.

However, it’s much better news for the established vendors, when things are measured in revenue. Sierra was in first here, with 32%, Gemalto took second with 20%, Telit was in third with 18%, and then SimCom charts in fourth with 9%. u-blox accounted for 7%, and the ‘Others’ had 14%.

As for the Riot 50, we examined u-blox’s performance last week, after it warned that it expected a slow-down in the shipments of LTE Cat-M1 and Cat-NB1 units in H2 2018. Since then, u-blox’s share price has fallen further, now at 131 CHF, and far from a near-historic peak of 213.60 CHF on June 11.

To date, u-blox is down 22.07% in the Riot 50, and after the earnings announcement, its share price fell 18%. By comparison, its competitors that are tracked have had a mixed bag. Telit is up 6.89% through the same period, and Sierra Wireless is up 3.29%. Sequans is down 3.49%, Skyworks is down 7.03%, and Sunsea Telecommunications is down 24.6% – the worst performer.