Description

We recently established a position in CRNT and thought it would be helpful to focus on the Aviat special situations dynamic here.  Please see Jaysan33’s very informative write-up from last June for a better understanding of CRNT’s business.  Despite its share price being down 50% from the time of that write-up (and near its historical 1x book value floor – see graph below), fundamentals are set to inflect in front of a multi-year 5G tailwind.  This attractive runway was recently validated via a hostile takeover attempt by a key competitor, Aviat Networks (“AVNW”).  While AVNW is the leader in North American backhaul, CRNT is now encroaching on its territory, having secured contracts with all the major NA mobile network operators (including DISH).  AVNW’s proxy fight was clearly an attempt to use the difficult equity market environment to scoop up an undervalued asset, but their offer price at $3.08 per share (71% above the current share price) highlights how egregiously the market is misvaluing CRNT.  While we’re not expecting a deal to be consummated (bid-ask seems too wide), renewed talks between AVNW and CRNT present the potential for near-term upside realization for CRNT shareholders.  Regardless, the fundamentals of CRNT’s business appear sound enough to reward medium-term shareholders.  While we’re negative on the overall macro, CRNT represents a mispriced small-cap stock (exacerbated by tax-loss selling and the AVNW dynamics).

AVNW Situation

On June 27^th, 2022, AVNW went public with a hostile proposal to acquire CRNT for $2.80 per share in cash.  In connection with this offer and their build-up of a 5% stake in CRNT, AVNW called for an EGM to propose the removal of certain CRNT board members and the election of a slate of AVNW-selected directors.  AVNW stated that they had been unable to come to an acceptable agreement with CRNT Board and Management and thus were taking the matter directly to shareholders. On August 2^nd, 2022, AVNW increased its offer to $3.08 per share including $.28 of consideration in AVNW shares.  The EGM was held on Aug 23^rd, 2022 and CRNT holders rejected AVNW’s low-ball bid.  Unfortunately, though, the stock prices has since fallen back meaningfully as a result of market volatility and the likely exiting of AVNW’s 5% position.

We ultimately don’t expect a deal to get done between the two companies because the bid-ask seems to wide: in response to the takeover battle, CRNT published their internal fair value estimate of $5.00 per share; and based on our discussions with CRNT’s CEO, it seems that the Company is unwilling to sell-out when they feel the underlying business momentum is so strong.  Ultimately, an all-stock deal makes the most sense to bridge the bid-ask gap, but it feels as though AVWN was opportunistically trying to get a good asset on the cheap.  Since 8/23/22, CRNT has continued to press release new customer contracts, keeping the ask high.

That being said, we  do think the AVNW proxy fight does serve to highlight some fundamental trends in the industry:

1. AVNW is primarily a vendor to U.S. network operators, but also has a sizable presence in private cellular networks.  But CRNT’s R&D has been paying off and they have now secured deals with every North American Tier 1 operator.  They have also secured a deal with DISH for its 5G network roll-out.  Further, CRNT also plays in the private cellular network space, recently press releasing a rip-and-replace deal with a California water utility.  CRNT is clearly encroaching on AVNW’s territory and the timing of AVNW proxy fight makes sense in terms of recent CRNT business momentum.  Finally, according to our conversations with industry experts, AVNW does not have a front-haul solution, but has a very compelling backhaul solution.  There’s no reason to think that AVNW can’t develop a fronthaul solution, but as of now, CRNT is the first mover.
2. While U.S. operators are busy competing with each other and lighting all the new spectrum they have purchased, international operators are still densifying 4G before they get to 5G.  AVNW’s revenue is 66% North America compared to 16% for CRNT.  By purchasing CRNT, AVNW would not only protect its US position, but provide a longer growth runway internationally.
3. One of AVNW’s criticisms of CRNT was CRNT’s strategy of internal chip design and development.  AVNW utilizes Maxlinear for its chip design and has seemed to face fewer delays in tape-out of new products.  But the fact that CRNT is taking share in North American indicates its internal chip R&D is creating value, while the supply chain environment has been an exogenous, not an idiosyncratic, factor.  It wouldn’t necessarily be seamless to shift all of CRNT’s products to a new chip design (plus having to migrate all of the software), which is why we view this AVNW criticism as simply a ploy to influence less sophisticated investors.

All-in-all, we believe the AVNW proxy battle served to legitimize CRNT’s fundamentals and business strategy.  While we’re not expecting a deal to get consummated, it’s absolutely possible CRNT and AVNW are negotiating behind the scenes on a fair price.

Absent a deal, CRNT shareholders did get some positive changes from the fight:  1) Post EGM, CRNT announced the resignation of a current non-independent director and nominated a new independent director to the board.  This new director nominee has both industry experience as well finance and accounting experience; 2) In August ’22, CRNT brought on a new CFO who has 20 years of CFO experience as well as M&A experience from the both the buy and sell-side.

The most important thing CRNT can do post proxy fight is to ensure they are focused on driving shareholder value.  Our conversations with the CRNT CEO confirm this focus.  This focus should encompass free cash flow generation as well as taking actions to ensure the stock price reflects fair value.  We believe the proxy battle has served to put the onus on CRNT management to get the stock price above AVNW’s buyout price of $3.05 per share at a minimum.

Catalyst

Potential AVNW deal

Freight improvement + 5G tailwinds = EPS upgrades

Renewed management focus on FCF generation