Good day, and thank you for standing by. Welcome to the Aviat Networks investor call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Andrew Fredrickson, Head of M&A and Investor Relations. Please go ahead.
Thank you, and good morning, everyone. Thank you for joining this Aviat Networks investor call. On the call today for Aviat is Pete Smith, President and Chief Executive Officer, David Gray, Chief Financial Officer, and Gary Croke, Vice President of Marketing, who will make remarks on the announced acquisition of NEC's Wireless Transport business. We will then open the call for a question-and-answer session. An archived webcast of today's call will be available on the company's website. During this call, management may make forward-looking statements which involve risks and uncertainties that could cause our results to differ materially from management's current expectations. We encourage you to review the cautionary statements in risk factors contained in the press release, which is available on our website and in the company's SEC filings, such as its 10-Q and 10-K.
Additional information about NEC can be found on their website and their filings with the Japan Securities authorities. Aviat Networks undertakes no obligation to publicly revise or update any forward-looking statements to reflect future events or circumstances. Furthermore, during the call, the company will discuss non-GAAP financial measures. A short presentation was added to our investor relations website, which will be referenced on today's call. I will now turn the call over to David Gray, our CFO. David?
Thanks, Edward. Thank you, Andrew, and good morning, everyone. As announced earlier today, Aviat Networks and NEC have entered into an agreement for Aviat to buy NEC's Wireless Transport business in an asset purchase for $70 million. The transaction has been approved by the boards of directors of both companies. We expect the deal to be completed within the calendar third quarter of 2023, subject to regulatory review and other specified closing conditions.
First, I'll start with an overview of the terms and financial implications of the microwave acquisition and then to turn the call over to Pete for further commentary on the transaction rationale and outlook for Aviat. Please note all subsequent figures will be stated in US dollars only. Beginning on slide 3, under terms of the agreement, Aviat will pay $70 million for the business via an asset purchase transaction.
The deal consideration will be comprised of $45 million in cash to be funded via a bank term loan and $25 million in Aviat shares. This is a moderate amount of debt and represents approximately 1.2x gross leverage and 0.7x net leverage as compared to Aviat's standalone trailing 12-month EBITDA. Now, let me give you some perspective on the potential contribution NEC's microwave business brings to Aviat Networks. We anticipate that the revenue contribution will be approximately $150 million annually. The business today has gross margins around 30% and operates at break-even EBITDA levels. Through leveraging the scale of the combined entities, we believe that this entity will reach a run rate EBITDA similar to Aviat's recent range of 11%-13% by the end of year two.
We expect the transaction to be accretive to normalized earnings by the end of the first year. With that, I'll now turn over the call to Pete to provide additional commentary on this exciting development for Aviat. Pete?
Thank you, David. Thank you to our shareholders who have dialed in for this call. I'm pleased to report today on our proposed acquisition of NEC's microwave division. As you know, Aviat is a leading provider of wireless transport solutions worldwide. Over the past few years, we've discussed our capital allocation strategy and the desire to pursue a transformational acquisition to make Aviat the leading wireless specialist in the industry and to scale our business.
This transaction represents that transformative opportunity. We have found a highly complementary business in NEC's microwave division, as detailed in the transaction rationale on slide 4. NEC's microwave business is a Japan-based organization of point-to-point microwave and millimeter wave solutions for service providers and private networks worldwide. NEC delivers connectivity solutions for critical applications that require high levels of reliability and security, very much aligned with Aviat's value proposition today.
This acquisition builds on the successful deployment of the Aviat Operating System used in the highly accretive Redline transaction and the 2019 North American partnership between NEC and Aviat. The addition of NEC microwave business immediately increases Aviat's presence in the international market with a long list of brand name customers. Combined, the new business will have over 21-20 Tier 1 customers. This is an exciting opportunity for Aviat and NEC. As shown on slide 5, the acquisition creates the third-largest microwave player and positions the combined entity to best compete with the microwave generalists of Huawei, Nokia, and Ericsson, as well as the fiber optic players who collectively hold 35%-40% share of the backhaul market. We believe the acquisition of NEC has 3 significant benefits for Aviat, our combined customers, and our shareholders. First, the transaction will immediately improve our financials.
On slide 6, you will see we anticipate an additional $150 million in revenue from the transaction, and we expect this will be accretive to adjusted EBITDA, non-GAAP EPS and free cash flow by the end of the first year. We will use cost synergies to pay for the acquisition, which will primarily come from complementary businesses and build from our learnings of the 2019 channel partnership with NEC for North America. These cost savings will come from both sides and a mixture of COGS and SG&A synergies. We have complementary products and customers with little overlap in key product offerings and very few common accounts, representing an opportunity for sales synergy in both Aviat and NEC customers. Despite these benefits, we have not assumed any revenue synergies in our financial model.
Second, this acquisition enhances Aviat's portfolio and provides scale to innovate. Please turn to slide 7. The combination creates what we believe will be the leading product portfolio in the industry with the broadest and deepest technology set to address customers' needs for both service providers and private networks. This includes best-in-class products for split mount, all indoor and all outdoor microwave millimeter and millimeter wave applications, along with point-to-multipoint access, LTE routers, and a complete portfolio of network management software. The combined R&D budget will enable the most compelling next-generation solutions from the specialist microwave player with scale. Third, this transaction makes us a more diversified business based on geography. See slide 8.
Aviat's business is currently over 60% from North America. With this transaction, we'll shift the combined entity to 60% international, increasing Aviat's exposure to global 5G spend and private network opportunities and giving us a stronger presence in fast-growing international markets. There is very little country overlap. Vertical markets. See slide 9. Aviat's business is currently about two-thirds private networks. We'll move to approximately 45% private networks and 55% service provider, balancing impacts of different CapEx cycles between private networks and service providers. We will have diversified customers. The business will have very few overlapping customers. Post-close, no customer will make up over 10% of revenue. Finally, we will see diversification of our portfolio. NEC's business is approximately 90% split mount.
The new business will be a balanced mix of split mount, all indoor, all outdoor routers access, including LTE and software. This improves our portfolio offering and increases our ability to cross-sell. These are two complementary businesses no matter how you look at them. Before opening the call to questions, I'd like to briefly talk to the employees of Aviat and the NEC employees who will be joining the largest microwave specialist player. This transaction will be hard work, but we will forge a winning organization. Throughout the diligence process, we have seen the strength of the NEC team and know that the two businesses will be stronger together. I ask for your support in building this winning team.
In summary, we believe this transaction will improve our financials in a meaningful way, bolster our portfolio offering, and increase our differentiation, all of which will make Aviat a more attractive company to customers, employees, and shareholders alike. We would like to reiterate that our full year fiscal year 2023 guidance remains unchanged. With that, we would like to open it up for questions.
Thank you. At this time, we will conduct the question-and-answer session. As a reminder, to ask a question, you will need to press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from Scott Searle with Roth Capital Partners. Scott, your line is live.
Hey, good morning. Congratulations on the transaction. Thanks for taking my questions. Hey, Pete, maybe quickly to get calibrated, you've given, I think, the initial revenue for NEC, and I think their EBITDA breakeven. To dive in a little bit more, can you give us an idea about what their trajectory of growth has been? I'm not sure if there are OpEx synergies that you specifically highlighted, but if you could talk about that and plans for gross margin expansion on the NEC front. Then I had a couple follow-ups.
Yeah. On the gross margin front, we will, you know, run the Aviat Operating System and drive cost out. We think that, you know, over the past couple years, we've performed well with respect to supply chain. We think that there's gonna be some supply chain cost out. Then there's certainly overlap in SG&A, particularly in R&D. We think that that's, those combined will allow us to pay for the transaction. With respect to growth, You know, what we have in our model is mid-single digits, and, you know, we're pretty confident that that will materialize. You know, we didn't put more in, you know, What we learned from the Redline transaction is, the cross-selling opportunities take about a year to develop.
We think that that will be, you know, as we make our way in the transaction and get to closing and get more intimate with the business, then we can revise that upwards.
Great. I apologize, Pete, but did you give an OpEx synergy number? Then as it relates to the complementary product aspect, certainly there are geographic aspects and customer aspects, but do they bring some mid-band opportunities for you? I think you mentioned point-to-multipoint as well.
I don't think I mentioned point-to-multipoint. Gary will jump in on the products in the mid-band. For modeling purposes, you know, we think $20 million would be the right number to put in your modeling, right on the cost synergy side. Scott and Gary, why don't you jump in?
Yeah, great.
Go ahead. Go ahead.
Yes, Scott.
That's perfect. Thank you.
Right. On the mid-band, Scott, their products are licensed band point-to-point, from 6 to 90 gigahertz. You know, nothing below 6 and no point to multipoint. It's all in the licensed point-to-point bands.
Lastly, if I could, just, the expected borrowing costs that you're expecting on the $40 mil, $45 mil. Thanks. Thank you. Congrats.
Thanks.
You know, as disclosed in 8-K that just filed this morning, you know, it'll be a delayed draw term loan, which will be, you know, SOFR-based, variable rate plus an interest margin. Obviously, you know, a little higher now than it was a year ago, but certainly manageable and not burdensome to us.
Thank you.
One moment for our next question. Our next question comes from the line of Erik Suppiger with JMP. Your line is live.
Yeah, good morning. Congratulations. Looks like a good combination. Can you speak to how your products compare with the NEC's, explain a little bit about why they're so complementary, where they fit into the network? Does this imply a greater focus on tier one service providers going forward? Is that going to imply a significant change in terms of your product roadmap and in terms of your sales model, maybe moving more to a direct sales?
Yeah. We are mostly direct sales in our private network and in our existing tier ones. Certainly, this will change the mix of customers to, you know, now combined will be over 20 tier ones. We think that this is really good for, you know, our combined private networks businesses because the adoption curve is typically the tier ones drive the technology innovation and then, you know, it gets reengineered and tailored for private networks. We think that this combination is gonna make our leading private network business even stronger.
On the portfolio side, our intent is to maintain the current portfolios of both companies, but as we come into the next generation to make one leading portfolio out of the R&D capabilities of both sides and the technology kernels that we have in both of our portfolios.
Okay. Very good. Thank you.
Thank you.
One moment for our next question. Our next question comes from Tim Savageaux with Northland Capital Markets. Tim, you are live.
Great. Good morning and congratulations on the deal.
Thanks, Tim.
Really does look good. First question is on technology platform, and, you know, kind of your respective strategies there. Is NEC merchant-based, and is there any kind of synergy or overlap amongst your suppliers, would be the first question?
NEC's micro division, microwave division, they leverage, you know, kind of a big company model where there's centralized manufacturing. We think that there's gonna be COGS synergies between our contract manufacturing approach and theirs. That would be one. Secondly, there are a lot of overlap in the supply base. We think that that's, you know, a good place to look for cost synergies.
Okay, great. Can you say at least currently configured, how many employees the organization has? You know, obviously APAC is a big part of the business. You know, can you call out any... A, how much of that is Japan or how significant is Japan? B, can you maybe call out some representative kind of tier one customers around the region to give us, you know, a sense of the footprint there.
Yeah. There's very little business in Japan. Japan is mostly fiber. On the tier ones, what I can say is there's a significant I can't name the customers at this point. There's a significant presence in Indonesia, which is a geography that's well suited to microwave. They also have reasonable presence in India, Mexico, and Australia.
Great. That's really helpful. Did we hit the employee thing or no?
there's about 350-400 employees on their side.
Yep. Thanks very much.
Thank you.
Well, no. Wait, I had one more. Am I gone?
Go ahead.
Okay.
Yeah.
And I, my final question, I guess is, kind of on the tax impact and the use of the NOL. I know you got a bunch of them. I know a lot of it's U.S. and obviously a bit of it's foreign. How do you think that's, you know, gonna shake out in terms of your current kind of de minimis tax, cash tax position?
Yeah. I think, in general, you know, most of the business in this deal is gonna be international. You know, we'll obviously have some impact on our utilization of U.S. NOLs. We also have, you know, foreign NOLs, a lot of which have, you know, full valuation allowances against them. Depending on the final, ultimate organizational structure that we go with from an entity perspective, could be an opportunity to more fully utilize those and, you know, potentially, you know, reverse that VA. You know, time will tell on that one.
Okay. Thanks very much, and congrats once again.
Thanks, Tim.
Thanks.
One moment for our next question. As a reminder, to ask a question, you will need to press star one one on your telephone. Our next question comes from the line of Paul Essi with William K. Woodruff. Paul, you are live.
Yes, thanks for taking my question, and congratulations on the acquisition. Couple real quick ones. Have you guys gone up against NEC in the past, and how have you fared if so?
You know, on the chart in the investor deck, you know, there's it lists out approximately 10 competitors. Yeah, we have gone up against NEC in the past, and I would say we've won some and lost some.
Okay. I understand that, you know, the cross-selling opportunities are not in your numbers. It's a year out, but it would seem to me that the possibilities are fairly significant. Would you be, you know, able to share how significant you think it might be a year from now as you move in that direction?
You know, when we did the Redline transaction, we justified it with no revenue synergies, and we've done that again here. You know, I think we said that the, you know, the funnel was building in Redline a year, and I think it would be, you know, it's fair for you to ask, but it's a little premature until we, you know, are together and can, you know, get all of our customers in the same Salesforce database and start to work on it. You're right that it could be significant, but it's premature for me to put a number on it, Paul, but you're right to ask.
Okay. I understand. That's all I had. Thank you.
Yeah. Thanks.
I would now like to turn it back to CEO Pete Smith for closing remarks.
All right. To follow up one, on one of Erik's questions, you know, on the portfolio side, the split mount plus our all indoor, all outdoor radios, we think that's, you know, that's compelling from the product side. Just to follow up there. To move to closing, I'd like to thank everyone for joining on short notice. We look forward to our next update after we close our fiscal year, and we will keep everyone informed as the transaction progresses from signing to close. Thanks everybody for joining.
Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.