RICHARDSON, Texas -- CommScope Inc. (NYSE: CTV) today announced plans to buy Avaya Inc.'s (NYSE: AV) Connectivity Solutions (ACS) business for $263 million.
The deal consists of CommScope paying Avaya about $210 million in cash with a convertible note payable in the amount of $18 million, and about 2.7 million shares of CommScope stock, valued at about $34.9 million. CommScope, too, will take on up to $75 million in ACS liabilities, mostly related to employee matters. The transaction is expected to close by the year's end.
CommScope makes cabling, especially the coaxial and fiber optic cables used for data, voice, and video transmission. Its net sales to Comcast Corp. (Nasdaq: CMCSA, CMCSK) accounted for about 20 percent of its total sales for the six months ended June 30.
ACS sells cabling, too, but mostly structured cabling to enterprises for local area networks, as well as cabling for telecom central offices. It also sells environmental enclosures -- equipment cabinets for both indoor and outdoor use.
From Avaya's point of view, the deal appears to be a good one. ACS brought in about 13 percent of Avaya's revenues during its fiscal year 2003, but it comprised about 29 percent of the company's headcount.
ACS employs about 2,000 in Omaha, Neb.; Bray, Ireland; and Brisbane, Australia. The company's administrative offices are here in Richardson.
The Avaya unit had sales of $542 million during fiscal 2003 and reported an operating profit of $3 million. Avaya said back in February 2002 that it would try to find a buyer for ACS so it could focus on providing IP telephony gear and services.
For CommScope, the purchase gives it a broader customer base, as well as some revenues that are tied to enterprise spending, as opposed to cable and telecom capital expenditures. In response to one analyst's comment that the move gets CommScope "out from under the thumbs of the MSOs," CommScope CEO Frank M. Drendel chuckled and remarked, "It certainly makes us a more diverse company."
Indeed, CommScope needs another revenue source. Cable industry infrastructure spending is expected to be about $11.1 billion -- about 38 percent off 2001 totals, according to Kagan World Media.
CommScope's sales of broadband and video cabling were down 2 percent from a year ago during the third quarter of 2003. Its sales to Comcast during that period were about 17 percent of its total sales. The company reported third-quarter earnings of $1.1 million or 2 cents a share, on revenues of $148.7 million.
For the year-ago period, CommScope reported a net loss of $19.6 million, or 32 cents a share, on revenues of $147.8 million. That included one-time charges related to idle production equipment and losses in its OFS BrightWave interest. (In 2001, CommScope acquired about 18 percent of OFS BrightWave, an optical fiber venture between CommScope and Furukawa Electric Co. Ltd. OFS Brightwave, according to SEC filings, produces as much red ink as it does optical fiber.)
Not including the ACS deal, CommScope expects sales to fall 5 to 10 percent next quarter, and it expects gross margins to be down 100 basis points (about 1 percent) sequentially.
CommScope says it expects to incur about $25 million in transition costs during the combined company's first year. But there is a silver lining: Over time, CommScope also expects it will be able to lower ACS's operating costs by $20 million a year. ACS will function as a separate subsidiary.
— Phil Harvey, Senior Editor, Light Reading