Ending speculation about the likelihood of a deal, CommScope has agreed to pay $3 billion for most of TE Connectivity's networks business with the aim of boosting its international presence and expanding into new parts of the equipment market. (See CommScope Eyes $3B Takeover of TE's Networks Unit.)
The transaction is to cover TE Connectivity (NYSE: TEL)'s telecom, enterprise and wireless divisions, which together generated revenues of about $1.9 billion in the year ending September 26, and is expected to close by the end of this year.
CommScope Inc. , which expects to report revenues of about $3.86bn when it publishes its 2014 results on February 20, generates the bulk of its sales in the US market, while TE does most of its business in Europe, the Middle East, Africa and the Asia-Pacific.
As well as helping it to enter new geographical markets, the takeover will also give CommScope control of TE's fiber technology business, allowing it to provide a broader range of services to its customers.
"The market is going through a transition as it evolves from copper to fiber and TE offers a great advantage here to see that business grow," said Eddie Edwards, CommScope's CEO, during a conference call with analysts. "There is volatility -- that's no different from in our wireless business -- but we've taken all that into account and we're comfortable with the numbers and growth in future."
Elsewhere, there is considerable overlap between the CommScope and TE businesses -- both companies are, for instance, major players in the market for Distributed Antenna Systems -- and CommScope believes it can realize annual cost synergies of $50 million in 2016 and $150 million per year from 2018 onwards. (See CommScope Acquires UK Wireless Specialist, CommScope Expands SiteRise , The Case for Indoor Wireless Coverage , TE Connectivity Shows Off Small Cell Innovations and TE Reckons Coolbit Is Hot Stuff.)
It also expects the deal to boost its adjusted earnings per share by roughly 20% in the first year after closing.
"We believe the $150 million is a very conservative number," said Mark Olson, CommScope's CFO, after being asked to provide further details about savings during the conference call. "We believe there will be significant incremental savings beyond those and they are not concentrated in one particular area."
Clearly, there may be considerable scope to reduce headcount and realize savings on real estate after the merger, which will see CommScope acquire some 10,000 employees and 65 facilities from TE, as well as approximately 7,000 patents and patent applications.
For TE, the sale ties in with a strategy of focusing more on the connectivity and sensor markets. The company reckons these represent a $165 billion opportunity, and claims that connectivity and sensor products will comprise as much as 90% of its entire portfolio following the sale of the telecom, enterprise and wireless units.
"We intend to use the majority of the proceeds from the sale for share repurchase," said Tom Lynch, TE's chairman and CEO, in a company statement. "We also expect to increase organic investments to strengthen our … range of connectivity and sensor solutions and make strategic acquisitions to further expand our customer offering."
Noting the combined company would have had $5.8 billion in net sales and $1.2 billion in EBITDA in the year ending September 26, CommScope said it would fund the deal through a mixture of cash on hand -- it had about $616 million on its books in September -- and up to $3 billion in incremental debt.
CommScope had $2.7 billion in long-term debt on its balance sheet in September and admits that net debt will grow to between four and 4.5 times adjusted EBITDA in 2014, from a ratio of about 3.2 at the moment, as a result of this additional borrowing.
It is, however, no stranger to such high leverage: When discussing financial results in October, Edwards pointed out that CommScope had held five times its annual EBITDA in net debt on two occasions in the past seven years.
"We believe we have a great financing package at near historic low interest rates and an outlook for growth post closing," Olson told analysts on today's call.
CommScope is guiding for flat to a 5% decline in revenues in 2015, compared with 2014, while TE expects sales to grow by 4-7% in its current financial year (the 12 months ending in September 2015).
Earlier today, TE posted a 33.7% year-on-year rise in net income for the October-to-December quarter, to $472 million, and a 7.2% increase in sales, to $3.47 billion.
— Iain Morris, , News Editor, Light Reading