Mergers & acquisitions

CommScope Puts Up $7.4B for Arris

It's on.

Following weeks of rumors that M&A talks were afoot, CommScope announced Thursday that it will acquire Arris for $31.75 per share, or a total price of roughly $7.4 billion, including a repayment of debt. (See CommScope to Buy Arris for $7.4B.)

Tied in, The Carlyle Group will re-establish its ownership position in CommScope Inc. with a minority investment of $1 billion.

CNBC reported yesterday that the two were close to finalizing the deal, but had the price much lower -- in the neighborhood of $5.6 billion.

The tally in the announced deal represents a premium of about 27% to the volume-weighted average closing price of Arris Group Inc. (Nasdaq: ARRS)'s common stock for the 30 trading days ended October 30, 2018, the day prior to rumors indicating that the companies were in M&A talks. (See CommScope, Arris Nearing $5.6B Deal – Report and CommScope in Talks to Buy Arris – Report.)

Update: Investors reacted quickly to the announcement. CommScope shares were down $2.88, or 11.76%, to $21.61 each in pre-market trading Thursday. Arris shares were up $3.08, or 11.08%, to $30.87 each in pre-market trading today.

The deal, which brings another level of consolidation to the cable, telecom and wireless product market, will create a technology behemoth that will see its addressable market double to more than $60 billion, the companies said. Areas of focus include "converged small cell" products for licensed and unlicensed spectrum, wired and wireless communications infrastructure, private network products for enterprise customers and public venues, and a line-up of connected/smart home solutions.

In justifying a merger designed to scale up a wireline and wireless portfolio with an eye fixed on the 5G era, the companies claim that they'll be able to generate about $1 billion in cash flow from operations and be more than 30% accretive to adjusted earnings per share in the first full year after closing, and produce annual cost synergies of more than $150 million within three years.

The merger, on a pro forma basis, will create a company with about $11.3 billion in revenue and adjusted EBITDA of roughly $1.8 billion, based on financials for the 12 months ended September 30, 2018. The combined company will also have 15,000 patents and about $800 million in average annual R&D spending.

The merger won't have much product overlap. Arris is primarily focused on consumer premises equipment (modems, gateways and set-tops), network and cloud (video and broadband infrastructure and software), and the enterprise market (via its recent acquisition of Ruckus Wireless and the ICX Switch business from Broadcom). (See Arris Completes Acquisition of Ruckus, ICX Switch Business.)

The companies have both been focused on the emerging, shared CBRS band. CommScope's Comsearch unit has developed a Spectrum Access System that ensures that licensed and unlicensed users in that CBRS band won't interfere with incumbent users. Arris, which has invested in another SAS company called Federated Wireless , has developed a line-up of CBRS products. (See Arris Hangs Hat on CBRS.)

In a statement, Eddie Edwards, president and CEO of CommScope, said a merger, which will tie together complementary assets for wired and wireless infrastructure, presented the "best path forward" with respect to growth and shareholder returns.

Arris CEO Bruce McClelland called CommScope an "ideal partner," noting that it provides "immediate and substantial cash value to our shareholders."

Following the close, expected in the first half of 2019, Edwards will remain president and CEO of CommScope, and McClelland and other members of the Arris leadership team will join the combined company. CommScope will stay headquartered in Hickory, N.C., and the company will "maintain a significant presence" in Suwanee, Ga. -- Arris's current corporate headquarters.

The companies are hosting a call today at 8:30 a.m. ET to discuss the deal in more detail.

— Jeff Baumgartner, Senior Editor, Light Reading

Jeff Baumgartner 11/9/2018 | 1:49:06 PM
Raymond James reax Among other reax to the deal, Raymond James analyst Simon Leopold has downgraded ARRS to Market Perform from Outperform ... He also noted that Q3 sales at Arris of $1.65B came a little under consensus of $1.71B and below the guidance range of $1.68B to $1.73B but met prior guidance of 65 cents to 70 cents GAAP EPS . 

He expects a weak first half of 2019 amid slower purchases by domestic customers with a "nice pick up" in the 2nd half of 2019. But Q4 2018 could be good as orders are pulled in before tariffs on Chinese goods bumps from 10% to 25% in 2019.

Like Piecyk, Leopold doesn't expect another bidder to swoop in for Arris, and said the $31.75 per share bid price is a bargain, given his prior target of $34. He also sees Arris shareholders giving it the okay, believing that they "would rather take the money than endure a tough 1H19." JB 
brooks7 11/9/2018 | 8:55:48 AM
Re: Strange Math  

It is all cash to existing shareholders.

The stock portion of the transaction was at least the $1B sold to Carlyle.

[In addition, The Carlyle Group, a global alternative asset manager, has reestablished an ownership position in CommScope through a $1 billion minority equity investment as part of CommScope's financing of the transaction.]


Jeff Baumgartner 11/8/2018 | 11:40:09 PM
Re: Strange Math Yes, Carlyle did take CommScope private in 2011, then re-IPO'd CommScope in 2013, and then "full exited" in late 2016. Direct from today's presentation deck: "CommScope was one of Carlyle's most successful investments ever" 
bosco_pcs 11/8/2018 | 8:36:28 PM
Re: Strange Math Thanks... I sold my ARRS shares last month because of the tariff issue but at least I didn't lose any money. If it is cash, then its shareholders can take the money and run. I am very suspicious of the COMM side though. Didn't it come back public recently. This may very well be a version of PE shop's infamous rinse-spin-repeat deal. Careful out there!
Jeff Baumgartner 11/8/2018 | 7:16:59 PM
Re: Strange Math It's an all-cash deal. Here's how CommScope outlines how it will cover its bases: 

-$900M in combined cash on hand expected at time of closing

-$6.3B of fully committed debt

-$1B of private equity convertable preferred from The Carlyle Group. 

On today's call, an analyst pressed CommScope on the leverage, which is expected to be 5.1x... CommScope's CTO CFO said that's within the company's historic leverage threshold levels and was confident that they'd be able to manage it at that level. Also expects that given the $1B per year of cash flow, that they'd be able to de-lever "quite quickly" to its target range of 2x-3x. JB 
bosco_pcs 11/8/2018 | 3:57:23 PM
Strange Math When i checked half an hour ago (~3:30PM EST), Comm's market cap is ~$4.71B and Arris's ~$5.05B. At 1st glance, some press said $7.4B in cash/stock. But no details abt how much is cash and what portion is stock swap 

One angle may be Arris is trying to escape its PLC (Brexit) situation, especially when offshore corporation is no longer advantageous tax-wise

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