US networks vendor CommScope is eyeing a $3 billion takeover of TE Connectivity's network equipment business, according to reports.
A deal could be announced as soon as this week -- according to this report from the Wall Street Journal (subscription required), which cited sources familiar with the matter -- and would give CommScope Inc. a presence in new fixed-line equipment markets as well as a bigger share of the wireless sector.
Both companies are among the four biggest in the market for Distributed Antenna Systems (DAS), according to market-research firm Infonetics Research, while TE Connectivity (NYSE: TEL) also sells equipment for use in service providers' central offices and with fiber-to-the-home applications. (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.)
CommScope is thought to be keen on acquisitions as a way of improving its growth prospects and diversifying into new areas, but analysts at Raymond James Equity Research have expressed skepticism that a deal of this magnitude is on the cards, arguing that smaller transactions are likelier.
CommScope had cash reserves of $616 million as well as $2.7 billion in long-term debt in its last financial quarter, and is expected to make around $400 million in free cash flow this year, according to Raymond James.
Even so, other analysts are far more bullish on the prospective deal. Jefferies reckons a tie-up would be "transformative" for CommScope, allowing it to grow sales by more than 65%, reduce competition in the market and realize synergies of about $50 million in 2016 and "considerably more" in future.
"Both businesses are very manufacturing and logistics intensive -- there would likely be a significant opportunity to consolidate in this area," said George Notter, an analyst with Jefferies, in a research note. "Other areas would include R&D -- the organizations would have some product overlap in areas like DAS systems, connectivity products for data centers and structured cabling."
Minus its submarine unit, which does not appear to be a target for CommScope, TE Connectivity's networks business generated $2.64 billion in its most recent financial year, according to Raymond James, and an operating profit including the subsea division of $198 million.
CommScope, meanwhile, made an operating profit of $330 million on revenues of $3.48 billion in 2013. (It has yet to report 2014 results.)
Nevertheless, CommScope would obviously have to raise more debt to fund a $3 billion takeover. Long-term debt could rise to as much as 4.8 times EBITDA as a consequence of further borrowing, according to Jefferies, up from the current ratio of about 3.2.
Eddie Edwards, CommScope's CEO, seems happy with this amount of leverage, judging by comments he made in a recent earnings call.
"From a leverage standpoint we have been levered as high as five times twice in the last six or seven years," he told analysts in October. "One of the strengths of the company has been its history of strong free cash flow generation. We will generate north of $300 million this year and we continue to see that grow going forward." (See this Seeking Alpha transcript.)
Markets have responded favorably to the news of a prospective deal. CommScope's share price had risen 8% on the NASDAQ in early-hours trading, while TE Connectivity's was up by 1.5% on the New York Stock Exchange.
— Iain Morris, News Editor, Light Reading