Gilat-Comtech Merger becomes Forced Marriage

Gilat Satellite Networks announced it intends to file a counterclaim against Comtech, demanding to enforce the $577 million Merger Agreement signed on January 2020, or otherwise determine financial compensation to the amount of hundreds of millions of dollars. Gilat’s threat comes after Comtech recently filed an amended complaint with the Delaware Court of Chancery, in which it has already asked quite explicitly from the Court to withdraw from the Merger Agreement with Gilat, which was in advanced stages of regulatory approval.

In its statement, Gilat said that it was aware that Comtech’s amended complaint requests an additional declaratory judgment which will confirm that due to COVID-19, Gilat has suffered a “Material Adverse Effect”, and therefore Comtech was not required to complete the merger. Gilat reacted sharply, “strongly rejects all these allegations,” claiming that Comtech’s complaint “is nothing short of an attempt to avoid its clear contractual obligation to acquire Gilat, due to Comtech’s own rapidly deteriorating performance.”

Exploiting the Russian Regulator

The initial complaint filed by Comtech concerned changes made by Gilat in its Russia-based subsidiary, which, according to Comtech, could have undermined attempts to receive approval from the Russian Monopoly Service (FAS). Gilat claims that it was only a pretext sought by Comtech in order to annul the Agreement, and whoever sabotaged attaining Russian approval was in fact Comtech: “Gilat believes that Comtech has willfully breached its obligations under the Merger Agreement so as to attempt to ensure that FAS approval is not timely obtained and Comtech will not be required to consummate the merger.

Gilat said in a press release that it intends to file a counter claim against Comtech seeking, “among other things, a declaration that Comtech cannot terminate the Merger Agreement and, if the merger is not consummated, Comtech should pay Gilat monetary damages for all losses that Gilat and its shareholders and option holders have suffered, which Gilat will assert amount to hundreds of millions of dollars.”

COVID-19 hit both companies

Gilat Satellite Networks provides satellite-based broadband communications, including a cloud based VSAT network platform, high-speed modems, high performance on-the-move antennas and high power Solid State Amplifiers (SSPA) and Block Upconverters (BUC). During Q1 2020, Gilat’s sales totaled $47.7 million, compared to $62.1 million in Q1 2019. The company said that the decline in sales was a result of the effects of the COVID-19 pandemic, mainly due to sharp decline in passenger aircraft market (Inflight Connectivity).

Comtech’s business situation is no different: for the quarter ended April 2020, it reported a 17% drop in sales to $135.1 million, also due to the COVID-19 pandemic. As a result, it was forced to take action to reduce expenses, including a 10% reduction in the workforce and a reduction in wages.