The following excerpt originally appeared as part of the Israel Opportunity Investor, a monthly newsletter I publish for paid subscribers.

Gilat Satellite Networks Ltd. (Nasdaq: GILT) provides Internet Protocol [IP] based digital satellite communication and networking products and services. The Company designs, produces, and markets very small aperture terminals (VSATs), two-way satellite ground stations with dish antennae smaller than 3 meters, and related network equipment. Gilat has customers in over 85 countries. Its products are primarily sold to communication service providers and operators that use VSATs to serve enterprise, government, and residential users. The company also provides services directly to end users in various market segments in the United States and Latin America. The Company competes with Hughes Network Systems, Viasat, Inc. (NASDAQ: VSAT), iDirect, AT&T, Inc. (NYSE: T), Verizon Communications (NYSE: VZ) and Qwest Communications International Inc. (NYSE: Q).

Investment Thesis

Gilat focuses on niche markets within emerging markets and the government sector, with a lot of opportunity for new deal flow in markets like Africa, Latin America, and Eastern Europe. A recent win with the US. Postal Service could be a good springboard to more deals of the sort. In the deal, Gilat's wholly-owned subsidiary, Spacenet Inc., is working with Verizon Business to deploy a custom satellite network for the Postal Service. The satellite network will provide high performance broadbandcommunications for over 5,000 Postal Service sites in the continental United States, Hawaii, Alaska, and Puerto Rico.

The company reported very strong third quarter numbers with revenues up 12% to $71.5 million over the same period in 2006. Net income more than doubled to $5.9 million. The company sees continued strong demand for their products, and has indicated that the business will continue its growth. The company has a market cap of a bit over $400 million and a strong balance sheet with over $150 million in cash.

While Gilat makes for an intriguing investment as a stand-alone company, rumors of a potential M&A make the stock even more attractive. An Israeli investment house, Mivtach Shamir, made an offer on the company earlier this year at $10.50 per share and was rebuffed.

In late September, Gilat announced that York Capital Management converted the debt it held in the company into stock, making York the largest shareholder, owning more than 30% of the company. The conversion is important as it helps strengthen Gilat's balance sheet by reducing interest payments by $6 million a year. Commenting on York's move, Gilat Chairman and CEO Amiram Levinberg said:

York's decision to shift its position from a debt holder to a shareholder is a strong vote of confidence in Gilat and significantly strengthens Gilat's balance sheet.

Competition in the satellite industry is heating up. Media companies, along with cable and wireless companies, have declared their desire to enter the satellite communications market. Instead of building an entire division dedicated to this, some of these companies are looking to either partner with, or acquire, an existing firm with good sales distribution. Gilat, with its focus on emerging markets and strong balance sheet, could be a good acquisition candidate.

Zack Miller is the Managing Editor of IsraelNewsletter.com and a former equity analyst for a leading multinational hedge fund. Author's fund owns GILT shares as of 12/15/2007.