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Technology Sectors

Market Sectors

Seeking to integrate detection technologies, ETD/EDS firms consolidate

By Adrian Courtenay

Three of the industry’s most significant companies— Smiths, Safran’s Morpho Detection, and Implant Sciences Inc. — have all been in the news lately. Smiths, headquartered in the UK, an-nounced Thursday that it had purchased Paris-based Safran’s Morpho Detection unit for $710 million. OSI Systems and L3 were rumored to be among the bidders. 

Implant Sciences, which is headquartered in Wilmington, MA, also is setting itself up for what it calls a “strategic alternative.’” The strategic alternative could be a sale, a merger or other signifi-cant change in operations, according to an 8-K filing with the SEC on April 8.

The motivation to merge stems in great measure for a desire to integrate complementary technologies into streamlined product offerings.  Smiths, according to industry experts, is primarily interested in Morpho’s broad range of EDS technologies, including Computer Tomography, Ion Trap Mobility Spectrometer trace detection, X-ray and X-ray Diffraction. Morpho’s strength in tomography is complementary to Smiths’ strength in X-ray.  Morpho does have an explosives trace detection business, but it has struggled significantly over the past few years and is a shrinking segment of the company’s revenues. 

Implant Sciences has emerged as the technology leader in the ETD segment, winning a $163 million ID/IQ (basically an open purchase order) from the Transportation Security Administration (TSA) and an initial order for.1170 Implant systems. The TSA began installing the systems in December. Implant also won a majority of contracts in Europe, which recently implemented a mandatory program to strengthen airport explosives and drug detection capabilities. Implant Sciences is considered by industry experts to be particularly attractive to homeland security and defense contractors because of its technology and its close relationships with security agencies in Europe, Asia and the Americas.

Implant’s 8-K filing detailed significant modifications to long-standing credit agreements with its financing partner, Platinum Partners, including the elimination of a blocking feature that prevented Platinum from owning more than 4.99 percent of the company. If it wishes, Platinum is now free to convert its convertible debt into preferred and common stock, which essentially would make Platinum Implant’s majority shareholder and in control of any transformative event. 

Estimating a selling price for Implant if it goes down that road is difficult.  On the one hand, the company is growing rapidly, with revenues jumping 5x in the past two years. On the other hand, its debt load is huge. It’s borrowed money from Platinum every year at 15 percent interest, and has paid back very little of it. Platinum also has had the right to convert unpaid interest into Implant stock at a price as low as 8 cents a share. It also has two other convertible tranches at more than a dollar. Platinum controls 57 percent of the company and appears to be anxious to get its money out. Eight years is a very long time for a hedge fund to hold its position. Implant, which declined to comment on the negotiations with Platinum, has two investment advisors, Noble Financial Capital Markets and Chardan Capital Markets, LLC, as well as the law firm of Wilke, Farr & Gallagher LLC, helping to look at strategic initiatives. 

 

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