CommScope in Talks to Buy Arris – ReportCommScope in Talks to Buy Arris – Report
Such a deal would bring another massive wave of consolidation to the wireline and wireless infrastructure sector and establish an even larger supplier with a major focus on the cable industry.
October 25, 2018
In what would mark another major wave of consolidation in the cable, telecom and wireless tech industries, CommScope reportedly is in talks to acquire Arris, the world's largest set-top box supplier that is also a key wireline and wireless infrastructure supplier to the cable industry.
Such a deal would bring more scale to CommScope Inc. with respect to product lines and customer base and improve its technology position as OTT video and video streaming become increasingly popular, according to Reuters, which reported about the talks Wednesday.
Reuters, citing sources familiar with the talks, also warned that the discussions might not lead to a deal, adding that it's not clear how CommScope might fund such an acquisition.
Arris Group Inc. (Nasdaq: ARRS) declined to comment on the report, thought its shares spiked 6.74% on Wednesday amid word of the talks. CommScope's stock dropped 4.5% yesterday, and also declined to comment.
Reuters noted that CommScope is eyeing Arris at a time in which its shares have struggled as the company and others in the sector, including Arris, see their wares become increasingly commoditized and exposed to greater levels of competition. Arris, meanwhile, has been dealing with a component shortage and new tariffs that threaten to cut into its bottom line. Just this week at SCTE's Cable-Tec Expo in Atlanta, it was announced that the cable industry is pursuing standards that would further commoditize the node market by establishing a baseline template for the housing and a uniform way for new capabilities to be added to them using snap-in modules. (See Arris Financials Clipped by Component Shortages, Arris: We're Tackling the Tariffs and Using a Lego Approach to Cable Node Upgrades .)
George Notter, analyst with Jefferies & Company Inc. , said in a research note that a merger would "make good sense for CommScope," in that it would give it customer diversification, help to balance out a declining wireless end-market while also boosting valuation and give it a path to management succession (current CommScope CEO Eddie Edwards is 69; Arris CEO Bruce McClelland would be a logical candidate to step in and run the combined company). He also sees some potential for manufacturing and distribution efficiencies.
Notter estimates a deal for Arris would add $1 in additional EPS power to CommScope.
Notter likewise thinks it makes less sense for Arris, but that view could change if CommScope was willing "to pay an abnormally large M&A premium." However, he said Arris could benefit from increased customer and market diversification (as much as 75% of Arris's business is focused on cable), but added that he'd be disappointed if the Arris board looked seriously at the deal given the company has a lot of potential upside to capture before considering a sale.
"We see some industrial logic to the deal, but we are not prepared to believe it," Simon Leopold, analyst with Raymond James Financial Inc. (NYSE: RJF), said in a note reacting to the deal speculation. "We see very little overlap for cost synergies beyond G&A. The companies are quite different, with ARRIS focused on electronics and CommScope on apparatus."
But scale is the name of the game these days. "It's clear that bigger is better," the analyst said, noting that the MSO service provider sector also continues to undergo major levels of consolidation.
Update: BTIG Research analyst Walt Piecyk also weighed in today, suggesting that CommScope would need to acquire Arris for between $6 billion to $6.5 billion, plus the assumption of Arris's net debt of $1.6 billion. Piecyk estimates that the combined company could realize $300 million to $450 million in annual cost synergies in SG&A (Selling, General and Administrative) expenses within 24 months, and play a part in a takeout price of $30 to $33 per share for Arris. Piecyk also believes that CommScope should offer at least one-third of the purchase price in stock.
For its part, Arris has grown immensely in recent years through a string of major acquisitions, including Motorola Home in 2013, UK-based Pace plc in 2016, and, more recently, Ruckus Wireless. (See Arris Secures Motorola Home and Arris Reports Ruckus-Raising Results.)
The merger would create a behemoth with a large wireline and wireless infrastructure portfolio along with set-tops, modems and other types of consumer premises equipment.
Both Arris and CommScope are also pursuing businesses that take advantage of the 3.5GHz Citizens Broadband Radio Service (CBRS) band, a shared slice of spectrum that's expected to fit into cable's mobile and wireless strategies for use-cases such as MVNO offload and private LTE networks for business service customers. (See Who's Doing What in the CBRS Band? and Proposed CBRS Rules Suit Cable's Cause.)
CommScope's Comsearch unit has developed a Spectrum Access System that will prevent new licensed and unlicensed users in the CBRS band from interfering with incumbent users. Arris, which has invested in another SAS company, Federated Wireless , has developed a lineup of CBRS products. (See Arris Hangs Hat on CBRS.)
— Jeff Baumgartner, Senior Editor, Light Reading
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