Maxar CEO Howard Lance w/ senior management. Photo: DigitalGlobe

Maxar Technologies issued a stern response to a report written Aug. 7 by Spruce Point Capital Management’s Ben Axler alleging serious mismanagement of the company by its CEO Howard Lance. Maxar claims the report “contained a number of inaccurate claims and misleading statements”. The company went further saying that it believes the report was a direct attempt by a short-seller to profit at the expense of Maxar shareholders, by manipulating its stock price.

Among the allegations in the Spruce Point report, Axler wrote that Maxar’s debt is ballooning as the company borrows to pay dividends. Axler believes the company will have to cut the dividend or risk breaking debt covenants. Healso claims Maxar has overdrawn its bank account twice in recent years, which it says is a big red flag for a cash-strapped business in decline. It is also says there has been a huge turnover in management and board members.

Thanos Moschopoulos, a technology equity analyst at BMO Capital Markets, put out a separate research note calling allegations in the Spruce report “baseless,” and claiming that the arguments “lack merit”. He also responded to some of the direct allegations made against Maxar and Lance. He said, “Spruce Point makes arbitrary adjustments to Maxar’s EBITDA, in making the case that Maxar will breach its debt covenants by year-end. The two key items that Spruce Point takes issue with (capitalized R&D and imputed interest on customer payments) are essentially IFRS adjustments, relative to U.S. GAAP. In our view, the only definition of EBITDA that matters is the one laid out in the credit agreement— which specifies that IFRS EBITDA is to be used in determining Maxar’s compliance with covenants.”

Spruce Point calls DigitalGlobe a “ticking timebomb” saying Maxar’s bull case for DigitalGlobe is predicated on two pillars, neither of which it believes to be true. It says: “Its contract with the National Geospace Agency (NGA) is priced too cheaply and is due for a price increase, and there’s a huge opportunity for DigitalGlobe outside of the U.S. government. Our work completed to date suggests both pillars seem unrealistic: it appears that DigitalGlobe is more likely to see prices decreases on the NGA contract and opportunities outside of the U.S. government seem limited, and have never lived up to expectations dating back to DigitalGlobe’s IPO.”

Moschopoulos also takes a closer looking at DigitalGlobe, and this specific comment in this report. He says, “Spruce Point argues that Maxar has been charging the U.S. government too high of a price for its imagery, relative to market rates, creating risk related to the EnhancedView renewal in 2020. We believe the fact that DigitalGlobe has a monopoly on commercially available 30 cm imagery should give it some pricing power. Further, the U.S. government has had the right to terminate EnhancedView at any time. If there were pricing issues, we presume the government would have previously forced DigitalGlobe back to the table for renegotiation, rather than continuously extending the contract (as it recently did, for another 12 months).”

Investment bank Credit Suisse also put out a report on the company this week, although this report was issued just before the Spruce Point report was puu. In the report, Robert Spingarn, a technology equity analyst at Credit Suisse talked about the prospects for the satellite manufacturing business. It looks particularly bleak in GEO. He said, “Space System Loral’s core market of large, highly sophisticated satellites appears to have found a new normal level of activity relative to the boom days of the mid-2010s, as commercial and government customers gravitate toward more nimble solutions (ie less expensive Low Earth Orbit satellites). Management acknowledged that volumes are unlikely to rebound from the 8-12 orders currently expected for the year, and it has begun to evaluate preliminary strategic options for the business.”

However, Spingarn said possible contracts in LEO could mitigate the declines in the GEO market. He added, “The company is taking steps to pivot into the LEO growth market by setting up a dedicated team in San Jose. The efforts appear to be bearing some fruit, as the company received a joint design contract with Thales Alenia Space for a large LEO constellation from Telesat. That said, Airbus, a leading LEO supplier, also received a development contract for the same project, with a final downselect in 2019. While this could be a sizable opportunity for Maxar, we note that LEO satellites overall tend to be more easily commoditized, and remain cautious on the move.”

Spingarn is cautious about Maxar’s prospects, adding, “We think investors are likely on the sidelines until they get a clearer view on the future of the GEO comsat market, or at least how the company intends to surmount the challenges facing this segment. Cash flow is also likely a show-me story at this point, until investors gain confidence that the company can execute on its imminent capex ramp and deleveraging plan.”