Monday, November 06, 2006

Calls of Note Part 4

- RBC Capital notes that for investors willing to stomach some uncertainly for beta, 3Com's (NASDAQ:COMS) shares may represent an opportunity. On November 15, 3Com can opt to
increase its stake in the H3C-JV from 51% to 100%. The JV so far has been successful in its targeted markets and has displayed top-line growth of 77% YoY ($170M in the recent quarter). Huawei meanwhile is very keen to sell its 49% stake, making for a tidy and simple transaction. However, price may be the sticking point, which is why PE-firms have been thrown in the mix, adding volatility to 3Com's shares.

While uncertainty may decrease and help the shares if 3Com gains full control of the JV, it may be offset by the decrease in cash value that may lower the cushion on the base-value of the stock. 3Com can instead sell its stake, netting a hefty profit, but then what? As 3Com would have lost the most valuable part of its business. They believe the bulk of the proceeds will be tax-free.

Considering a multiple of its projected-sales for CY07 (assume $850M), the firm estimates the value of the JV may be $1.5-$1.8B. With that said, 3Com may need to offer a price between $750M-$900M for the full remaining stake. 3Com currently has $1B in net-cash or $2.58/per share. RBC estimates 3Com may want to keep a cushion of at least $200M. Another scenario may end with 3Com obtaining 80% of the JV and leaving the balance as a good-faith gesture.

Thinks 3Com's shares may be attractive near the $3.50-$4.00 range. Book value is currently $3.05. 3Com trades at 0.6x CY07 revenue estimate excluding its net cash position. The peer group currently trades at 2.0x CY07 revenue estimates net cash per share. RBC's price target remains $5.

Notablecalls: Is RBC calling for a fall in COMS stock price? Think they are as there is very little chance the management can execute the deal so that everyone will be happy.

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