Terayon Preps for Likely Auction
LR Cable News Analysis Alan Breznick, Cable/Video Practice Leader, Light Reading 1/17/2007
Several industry sources say Motorola Inc. (NYSE: MOT) and Harmonic Inc. (Nasdaq: HLIT) are redoubling their efforts to snatch Terayon in the wake of Arris' stunning $1.2 billion bid for Tandberg TV earlier this week. (See Arris Pounces on Tandberg TV.) Sources say Cisco Systems Inc. (Nasdaq: CSCO) unit Scientific Atlanta also remains very interested in acquiring Terayon, but it may not enjoy the enthusiastic backing of its parent company.
Arris, widely considered a fourth possible suitor for Terayon, apperas to have dropped out of the hunt after stealing Tandberg TV from the clutches of such other potential buyers as Motorola. In a conference call with analysts and investors Tuesday morning, Arris chairman and CEO Bob Stanzione ruled out making any more acquisitions for the foreseeable future.
Goldman Sachs is actively shopping Terayon around, sources say, and it is expected that an auction process will take no longer than few weeks to play out. But, with the bidding in flux, it's not clear which suitor has the upper hand yet.
Sources generally believe that Harmonic, a smaller rival of Tandberg TV in the digital encoding business, now needs Terayon the most of the three remaining suitors. They say Harmonic must boost its size to sustain its competitive position against a bulked-up Arris, Motorola, and S-A.
"The Arris deal puts a tremendous amount of pressure on Harmonic," says Brian Coyne, an analyst at Friedman, Billings, Ramsey & Co. "Their strategic advantage has been diminished by this Arris-Tandberg deal."
A Terayon buyout also makes sense for Harmonic because it has been a major reseller of Terayon's popular line of CherryPicker digital video processing products. Although it no longer sells CherryPicker, Harmonic still sells other Terayon products and has been trying to match CherryPicker's success with its own gear.
But Harmonic may be no match for Motorola, which is far bigger and has been on an acquisition tear for the last year. In its latest move, Moto bought Tut Systems for $39 million last month. (See Moto Taps Tut for $39M.)
"If it's a bidding war between Harmonic and Motorola, Harmonic is going to lose," one source predicts.
The latest maneuvers come about a week after Terayon released its restated financial numbers for the first three quarters of 2006, coming in well below analyst estimates and its year-earlier totals. The company then issued its earnings estimates for the fourth quarter, as well as some guidance for 2007.
Terayon, which produced $58.7 million in total revenue for the nine-month period ending Sept. 30, said it expects to report $17.6 million to $18.6 million in overall revenue for the fourth quarter. The company expects its main digital video solution products, which generated a disappointing $42.3 million in sales for the first three quarters, to generate another $16.2 million to $17.2 million in the final quarter. It expects its overall net loss for the quarter to range between $3.5 million and $4.5 million.
"In 2006, we didn't have the growth we really wanted," says Mark Richman, Terayon's CFO. "We need to get the revenue lines growing again."
Looking ahead to 2007, Terayon executives see more promise. In a conference call with analysts and investors late Friday, they predicted that the company will start growing again as it settles several pending lawsuits and takes advantage of growing telco TV and mobile video activity, both in the U.S. and beyond.
"We expect 2007 to provide opportunities to deliver this growth," said Terayon CEO Jerry Chase. "We're not firing on all cylinders yet. But we anticipate operating free from distractions."
Terayon officials say they also plan to introduce several fresh products in the coming year, including new edge decoders and new video software applications. In addition, they intend to start testing MPEG-4 rate-shaping gear for high-definition TV (HDTV) next month.
At least one Wall Street analyst believes that better days could finally be ahead for Terayon. In a research report issued earlier today, Christian Schwab, a senior research analyst at Craig-Hallum Capital Group, upgraded Terayon's stock to a buy rating and set a $4 price target for the company's shares.
"We are optimistic that 2007 will be an inflection year for Terayon as its customer base broadens beyond leading cable companies to leading telco companies such as Verizon," Schwab wrote. "We believe Terayon is well positioned to return to profitability for 2007, which would be the company's first year of profitability ever."
But, even if its future prospects may look brighter, most industry sources still expect Terayon to sell out pretty soon. In his report, Schwab notes that both Chase and Richman have generous severance payment options in their employment contracts if the company should experience a change of control.
"They're a one-product company," says one source. "They really need to do an M&A deal."
— Alan Breznick, Site Editor, Cable Digital News