Comtech Systems headquarters. Photo: Comtech Systems

The acrimony between Comtech Telecommunications Corp. and Gilat Satellite Networks over the ongoing acquisition has heated up, as Comtech argues it is not required to close on the acquisition, and Gilat hit back calling for hundreds of millions of dollars in damages if the merger does not go through. 

Comtech has a pending lawsuit against Gilat in the Delaware Court of Chancery, and announced Monday that it has requested a judgment that Gilat has suffered a Material Adverse Effect (MAE) due to the damage the COVID-19 pandemic has done to the airline industry. An MAE is a change in circumstances that significantly reduces the value of a company. 

Gilat supplies Ku- and Ka-band antennas, transceivers, and baseband equipment for In-Flight Connectivity (IFC) applications. 

Comtech said Gilat is “disproportionately dependent [on the airline industry] compared to its peers and other companies in the industries in which it competes,” and due to this, Comtech is not required to close on the acquisition. 

Gilat “strongly rejects” these allegations, according to a statement released Sunday. “Comtech’s complaint is nothing more than an effort to avoid its clear contractual obligation to acquire Gilat, due to Comtech’s own rapidly deteriorating performance,” Gilat said. 

Gilat also said that Comtech’s “continuous willful breaches” have caused Gilat and its shareholders to lose money, and the company intends to file a counterclaim that if the merger is not consummated, Comtech should pay Gilat “hundreds of millions of dollars” in damages for Comtech’s breaches of the merger agreement. 

Also at issue are Gilat’s business operations in Russia. Comtech alleges that certain actions, including “unilaterally interfering in Comtech’s application for Russian regulatory approval and/or disposing of and/or restructuring Gilat’s business operations in Russia” would breach Gilat’s obligations under the merger.

Gilat has significant business in Russia with a Russia business division, and an office in Moscow. In 2018, Gilat signed an $18 million contract to provide ground infrastructure that Russian satellite operator Gazprom Space Systems (GSS) will use to launch a nationwide broadband network. The close of the merger is subject to regulatory approval in Russia from the Federal Antimonopoly Service (FAS), which executes antitrust law in Russia. In May, FAS extended the review period for Comtech’s application pending a decision under the Foreign Investment Law whether approval is required from the Chairman of the Russian Government Commission for Supervising Foreign Investments, according to Gilat’s First Quarter (Q1) 2020 financial results.

Gilat responded by saying the company has not interfered or taken any action to interfere with Comtech’s pending application with FAS. 

The merger was announced in January and at the time, Michael Porcelain, Comtech’s newly appointed president, called the acquisition a “perfect match,” and that acquiring Gilat would boost Comtech in the backhaul and IFC markets. 

But these new complaints are another bump in the road. Last week Comtech said it was assessing whether a decline in Gilat’s business gives rise to a MAE, and Gilat said its claims were without merit. In addition, Gilat’s CEO Yona Ovadia recently resigned abruptly. Ovadia originally was supposed to stay on as CEO of Gilat, according to the initial acquisition announcement in January. Gilat did not say why Ovadia suddenly resigned. 

A Gilat representative said the company was not able to provide any more information at this time, and Comtech did not respond to a request to comment.