Mitel, Inter-Tel merger deal hits snag

Inter-Tel Inc. founder Steven Mihaylo has forced the company’s board to delay a special meeting of shareholders to approve the proposed US$723-million acquisition by Ottawa’s Mitel Networks until July 23, raising questions of whether management has the votes to okay a deal that Mitel believes will give it improved access to U.S. telecom system buyers.

The board set the date on Monday after Mihaylo urged shareholders that he could manage a “leveraged recapitalization” of the company without taking it private which would yield “significantly greater present value” than the Mitel offer.

Mihaylo, who owns 19 per cent of the publicly-traded Tempe, Arizona-based maker of voice and data solutions and still sits on its board, tried and failed last year to take over the company after being forced out as CEO. He’d held that post since the company was formed in 1969. Inter-Tel’s board was scheduled to vote last Friday on Mitel’s US$25.60 a share offer, although Mihaylo’s letter to shareholders was sent June 4. However, according to a company spokesman proxy materials supporting the plea were only filed with U.S. regulators last week.

Mihaylo proposes using US$200 million in Inter-Tel cash and borrowing US$200 million more to buy back company shares at US$28 a share.

At press time Inter-Tel was trading in the US$24 range. Because of the July 4 holiday in the U.S., a member of the Inter-Tel board could not be reached for comment.

In a statement announcing the delay, Alexander Cappello, chair of the board’s special committee, said it wants to give shareholders time to review Mihaylo’s offer, including what he called “significant recent changes in the debt capital markets adversely affecting the availability and cost of financing for acquisition or recapitalization transactions” such as Mihaylo’s.

“We also believe it is vital that stockholders consider the letter we recently received from Mitel Networks Corporation informing us that Mitel cannot increase the purchase price in its merger agreement,” Cappello said.

In its June 22 letter, Mitel CEO Don Smith said his company can’t better the US$25.60 a share offer partly because Inter-Tel’s first quarter performance was below analysts’ expectations and because its offer is 10 per cent higher than any other cash bid, including Mihaylo’s.

Mitel refused Tuesday a request to comment on the Inter-Tel delay. But in an interview last month, Smith was eagerly looking forward to what he called a merger between the two companies. If the deal goes through, Mitel would put off a plan to go public for at least a year, he said.

Inter-Tel has more employees (1,940) and slightly higher annual revenue (US$458 million) than privately-owned Mitel, he said, but calling it a merger “puts us in the right head space” to learn from each other.

Inter-Tel, which makes the Axxess Converged Communications Platform, SIP and IP-based desk phones for offices and the EncoreCX line for small businesses, doesn’t do a lot of business in Canada, Smith said. But the deal will let Mitel offer a range of products in the U.S. from hosted managed services to systems for large enterprises.

Of the several hundred channel partners each company has in the U.S. only about 20 sell products from both firms, he added.

Although it would be a wholly-owned subsidiary of Mitel, the Inter-Tel brands would be retained, he said, and the unit would be called “Inter-Tel, a Mitel company.”

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