Arris Flirted With Handful of Potential Suitors

Jeff Baumgartner
News Analysis
Jeff Baumgartner, Senior Editor, Light Reading
12/3/2018



If Arris's M&A-related activities could be transformed into a Match.com account, it would seem pretty clear that the company was energetically weighing dating offers and considering marriage proposals since early 2017.

Arris held investment and/or acquisition discussions with a handful of other entities, and even received verbal interest for up to $32 per share from one of them, before talks with CommScope got serious and turned into the $7.4 billion deal that was announced on November 8, a new Securities and Exchange Commission filing shows.

According to a preliminary proxy statement filed November 30, Arris Group Inc. (Nasdaq: ARRS) also held earlier, separate talks with The Carlyle Group LLC , which eventually agreed to make a minority equity investment of $1 billion into the CommScope/Arris combo, and other unnamed entities referred to as Sponsor A, Sponsor B, Sponsor C, Sponsor D, and Sponsor E. (See CommScope Puts Up $7.4B for Arris, Podcast: CommScope & Arris Tie the Knot, but Why? and Why CommScope Wooed Arris.)

Break-up fees
The preliminary proxy statement also discloses the possible break-up fees, should the proposed deal somehow fall apart. Arris is on the hook for a $58 million termination fee under most cited circumstances, or $29 million if the deal isn't sanctioned by the court or the request shareholder approvals aren't obtained. CommScope Inc. is subject to a $250 million reverse termination fee, according to the filing.

Evercore, tapped by Arris in October 2018 as its financial advisor in connection with the sale, is entitled to receive an "opinion fee" of $6 million regardless of how things turn out. Arris had also engaged with Evercore in 2017 regarding strategic alternatives available to Arris and for its preliminary financial analysis of Arris.

The filing also affirms that Arris and CommScope don't expect to need China's approval, but that they might require clearance from the European Union, Chile, Mexico, Russia and South Africa. (See US, China Agree to Delay Tariffs Hike and Arris: Tariffs Add $200M in Broadband Gear Costs, Threaten US 5G Plans.)

Lots of talk before the walk
Before tying the knot with CommScope last month, the filing shows that Arris was contacted by several companies that expressed interest in investing in or acquiring Arris starting in 2017.

Carlyle first reached out in February 2017, and followed with a meeting with top Arris execs in April of that year. They didn't communicate again until August 2017, when Arris executive chairman and chairman of the board Bob Stanzione, in light of discussion with two other entities (referred to below as Sponsor A and Sponsor B), reached out to see if Carlyle was interested in continuing their talks.

February 2017: Sponsor A enters the fray
Sponsor A met with Arris in Atlanta in February 2017, and eventually entered into a non-disclosure agreement, but no further talks were held until the fall of 2017 in New York. Sponsor A later required more info from Arris, which was provided in October 2017, back when Arris's acquisition of Ruckus Wireless was still pending. That's where this trail ends, as there were no further discussions between Arris and Sponsor A.

July 2017: Sponsor B asks for a date
Through Evercore, Sponsor B and Arris met in late July 2017, resulting in an NDA. Another meeting with Sponsor B was held in September of that year, where an update on the pending Ruckus deal occurred and further talks were had on possible follow-on strategic opportunities. On October 24, 2017, Sponsor B indicated that it was not going to proceed with making an offer, as it did not believe it could offer a "meaningful premium" to Arris's stock at the time, which closed at $28.12 per share that day, and also cited risks associated with the closing of the still-pending Ruckus deal.

August 2017: Arris and CommScope wink at each other
Arris, Evercore and Carlyle reconnected in August 2017, entered an NDA, and had a preliminary call to discuss the current state of Arris's business. The following month, a Carlyle representative called Stanzione and asked permission to reach out to CommScope about a possible merger. On Sept. 25, 2017, CommScope president and CEO Eddie Edwards confirmed CommScope's initial interest, but, in early November, Edwards and CommScope board chairman Frank Drendel informed Arris that they were not interested in continuing merger discussions at that time.

February 2018: Sponsor B makes a move
Talks with Arris started to heat up again after the company wrapped up its acquisition of Ruckus on Dec. 1, 2017. (See Arris Reels in Ruckus Why I Like This Deal.)

In February 2018, Sponsor B came back to the mix, telling Evercore that it was reconsidering a deal with Arris now that the Ruckus deal was salted away. Arris supplied Sponsor B with Arris's 2018 budget and an update on its long-range financial plan, and later made additional due diligence requests of Arris. On May 24, 2018, Sponsor B, made a verbal indication to pursue a deal to acquire Arris for $30 to $32 per share in cash. Following a meeting of the Arris board, Evercore informed Sponsor B that Arris would be interested in a deal above $32 per share.

Sponsor B continued to ask for more data from Arris, and another meeting was held in New York on June 14, 2018, when Sponsor B put forth a new verbal indication of interest of $30.50 per share. The Arris board later authorized a counter offer of $31 per share, but Sponsor B told Evercore on July 11 that it did not believe they could come to terms, and discussions were terminated.

Mid-2018: More potential suitors enter the dating mix
Per the filing, a representative from Sponsor C reached out to Arris CEO Bruce McClelland in May 2018, and they eventually scheduled a meeting for September 2018.

In July 2018, an unidentified investment banker contacted Arris that reps of Sponsor D and Sponsor E were interested in meeting with Arris. Arris execs met with Sponsor D in Atlanta in September, and set up a meeting with Sponsor D in October. In November, Sponsor D informed Arris that it was not interested in pursuing the opportunity at the time.

Next Page: August 2018: CommScope & Arris get serious

August 2018: CommScope & Arris get serious
On Aug. 15, 2018, Drendel informed Stanzione that CommScope was again interested in a merger, and that resulted in a new NDA and CommScope's thoughts on the strategic merits of the deal. Due diligence on both sides got underway.

On August 24, an in-person meeting was held, followed by CommScope's submission of additional questions about Arris focusing on consumer premises equipment, capital expenditures and Arris financials that was supplied by early September. The full board of Arris was informed of CommScope's renewed interested at a special meeting held on September 24 that was called primarily for other purposes.

On September 12, CommScope put forth a non-binding written proposal to acquire 100% of Arris ordinary shares for a mix of cash and CommScope stock that would have represented $30 per share, and a 14.2% premium to Arris's closing price on Sept. 12 of $26.26 per share.

The Arris board held a special meeting on September 16 to discuss CommScope's preliminary proposal, after which McClelland informed CommScope's Edwards that Arris wanted a better offer Arris's analysis, McClelland said, found that the value that Arris brought to CommScope supported a higher valuation of Arris shares.

On September 19, CommScope submitted more requests to Arris focused on CPE and Enterprise market trends, and tax implications on a possible merger were discussed a week later. Further discussions also dug into the business effects from the US tariffs on certain Chinese goods. (See Sale of Arris Set-Top Box Biz 'On the Table' for CommScope Analyst , US, China Agree to Delay Tariffs Hike and Arris: We're Tackling the Tariffs.)

CommScope, on October 11, submitted a revised non-binding written offer of $31.50 per share in all cash, a 37.9% premium on Arris's closing price on October 11. The Arris board met again on October 13 to consider the new offer, and Arris again asked for a higher offer price. Edwards then made an offer of $31.75 per share in all-cash, subject to the completion of due diligence.

Stories of a possible deal between CommScope and Arris surfaced on October 24, which caused Arris to ask Evercore to engage with the UK Takeover Panel. The Panel agreed with Arris that the takeover code would not apply to the proposed Arris-CommScope transaction. In turn Evercore informed Sponsor B that they could not comment on the "rumor." (See CommScope in Talks to Buy Arris Report.)

On November 6, a report surfaced that a potential deal would involve an offer from CommScope for Arris above $31 per share. In response, Evercore informed Sponsor C that they could not comment on the rumor. (See CommScope, Arris Nearing $5.6B Deal Report .)

The Arris board held another special meeting on November 7 in Atlanta to provide an update on the discussions and recommended that shareholders approve the deal on the table. CommScope told Arris on that date that its board had approved the transaction.

CommScope and Arris issued a joint press release announcing the deal the morning of November 8 for $31.75 per share. They expect the transaction to close in the first half of 2019. (See CommScope to Buy Arris for $7.4B.)

— Jeff Baumgartner, Senior Editor, Light Reading

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