TORONTO (Reuters) - Shares of MacDonald, Dettwiler and Associates Ltd MDA.TO fell 5.9 percent on Thursday after the U.S. Department of Justice cast doubt on its plans to acquire the satellite manufacturing arm of Loral Space & Communications Inc (LORL.O).
The two companies late on Wednesday disclosed that the U.S. regulator has asked for additional information on the proposed deal, a move that analysts believe potentially jeopardizes both the timing of the deal and the likelihood of its closing.
“We believe both sides are motivated to close on a transaction, but the DoJ delay adds great uncertainty,” said RBC Capital Markets analyst Steve Arthur in a note to clients.
The regulator’s so-called “second request” for information prompted the brokerage firm to lower its rating on MacDonald, Dettwiler to “sector perform” from “outperform.”
Arthur, who believes the deal could face a delay of four to six months, also slashed his price target on MacDonald’s shares to C$54 from C$72.
Macdonald Dettwiler hopes that the $875 million deal, struck in June, will enhance its position in the communications arena and create potential for increased business with both commercial and government clients.
SS/L, Loral’s California based-subsidiary that MacDonald is acquiring, develops satellites that are used for television broadcasting, direct-to-home television services, broadband communications, military communications, wireless telephony and digital satellite radio, among other things.
Cormark analyst Richard Tse Said the regulator’s request adds risks for the potential deal.
“At the very least, it potentially pushes out the timing of the closing of the transaction into 2013, as we believe the request will require some time on MacDonald Dettwiler’s part to fully understand the nature of the request and gather the necessary information for review,” said Tse in a research note.
Shares of MDA closed C$3.17 lower at C$50.65 on the Toronto Stock Exchange on Thursday. Loral Space & Communications’ stock fell 26 cents to $74.39 on the Nasdaq.
The proposed deal for SS/L was announced roughly four years after the Canadian government blocked the C$1.33 billion ($1.36 billion) sale of MDA’s own satellite arm to U.S. rival Alliant Techsystems Inc ATK.N, on the basis that the deal was not of ‘net benefit’ to the country.
At the time, Canada said it feared that the sale of the MDA unit would have led to the loss of crucial technology and hampered its satellite surveillance capabilities. It marked the first time that the country used the powers of the Investment Canada Act to block a foreign takeover of Canadian assets.
“The issues that foiled the MDA-Alliant deal related more to sovereignty and national security under foreign investment law,” said a Canadian lawyer, who specializes in competition law and regulatory reviews.
The lawyer, who is not involved in the deal but who asked to go unnamed to protect business relationships, said the DOJ’s requests for additional information are typically related more to antitrust related concerns.
Antitrust and competition lawyers note that although second requests on deals are not commonplace - the requests do not necessarily mean that the regulators plan to challenge a deal.
In fiscal 2011, the U.S. Federal Trade Commission and the U.S. Department of Justice - the two agencies responsible for reviewing mergers for antitrust related concerns - reviewed some 1,450 deals, issued second requests on 58 of those mergers and went on to challenge nearly two-thirds or 37 of those proposed transactions.
MDA said the second request sought additional information primarily regarding its satellite communications antenna and payload business, which is a significant component supplier of antennas to the satellite industry.
“The addition of SS/L would potentially provide the joint companies with considerable more scale,” said Cormark’s Tse.
MDA said it will continue to work closely and cooperatively with the DOJ as it conducts its review of the deal.
($1 = 0.9751 Canadian dollars)
Reporting by Euan Rocha; editing by Carol Bishopric