Technicolor’s acquisition of Cisco Systems’ consumer premises equipment unit isn’t off to the best of starts.

Brazil's competition authority, CADE, said it has fined Technicolor and Cisco Systems BRL 30 million (US $7.2 million) for “gun jumping" on the transaction prior to CADE’s approval.

Technicolor and Cisco Systems announced the closing of the $600 million transaction on November 20, 2015, in which Technicolor took over Cisco’s Connected Devices unit, which makes set-tops cable modems and gateways.  

“The integration of the Cisco Connected Devices assets is starting immediately and the strategic collaboration agreement between Technicolor and Cisco is now moving into the implementation stage,” they said in the press release, adding that the transaction “has closed in all operating geographies, with the exception of Brazil, where closing remains subject to local approvals, and Colombia where Cisco Connected Devices’ operations have been carved-out pending a decision by the antitrust authority.”

CADE referenced that PR in its gun-jumping fine announcement, holding that excerpts from the release were “considered sufficient proof of gun jumping.”

"In addition, Cade discovered the incident on their own, having been notified by the company just three days after the publication of the press release," Cade reporting commissioner for the case, Paul Burnier, said, according to an English-translated version of the Cade announcement.

CADE said another question was raised by the “carve-out” agreement referenced by the companies – “ a contractual term with the intention to isolate the effects of a global transaction in jurisdictions where the transaction has not yet been approved by antitrust authorities,” CADE explained, adding that most antitrust authorities don't accept them because they usually aren't effective and are difficult to monitor.  

Cade said Cisco and Technicolor have agreed to pay the fine. Cisco and Technicolor have been asked for comment.

Update: A Cisco spokesman responded Thursday with this comment:

"Technicolor and Cisco acted in good faith when we isolated Brazilian operations during the transaction’s close, believing we could meet all global antitrust requirements and complete the transaction in Brazil when local regulatory approval was received. Both companies proactively reported the transaction close and carve out to CADE, and cooperated fully with CADE’s related investigation.

We acknowledge CADE’s announcement yesterday and accept the terms of the settlement. Both Technicolor and Cisco respect local law, and view the terms of the settlement as an additional commitment to our operations in Brazil." 

Brazil, he added "is an important market for Cisco, and we are very committed to the market’s long-term success." 

Update: Technicolor issued this statement on Friday (Jan. 22): 

"The Brazilian market is extremely important to Technicolor.  We are committed to being a good corporate citizen in this market. Based on the absence of antitrust issues with United States, Canada, Netherlands, Ukraine and Colombia, Technicolor was confident about receiving regulatory approval from Brazilian authorities.

"The decision by Technicolor and Cisco to carve out of Brazil – in order to respect and accommodate the Brazilian regulatory authority's timelines -- was made in good faith. It was publicly announced as well as reported to CADE. Technicolor accepts the terms of the settlement, and respects Brazilian laws."

Technicolor and Cisco announced the deallastJuly, noting that it also calls for them to create a strategic partnership that will allow both companies to develop and deliver next-gen video and broadband technologies, with a specific focus on Internet of Things (IoT) solutions and services. A long-term patent cross-licensing agreement is also factored into the deal.

Prior to the closing, Technicolor tapped former Alcatel-Lucent exec Luis Martinez Amago as president of its Connected Home division for the North American market, supporting Technicolor’s business with the region’s cable operators, telcos, satellite service providers and OTT players.

Cisco Systems pulled down a strong fiscal fourth quarter that saw a return to growth in its service provider segment, though the company continued to be nagged by the video side of the house.

Cisco, which is selling its set-top and CPE business to Technicolor for $600 million, said service provider video revenues were $994 million, down 7% from the year-ago period, and represented about 8% of overall revenues in the period. However, SP Video revenues were up 9% on a sequential basis, beating Raymond James analyst Simon Leopold’s estimate of $868 million.

Leopold reiterated that Cisco’s exit from the set-top box business did not come as a total surprise as the sector becomes more commoditized. “Overall, we see the [Technicolor] transaction impacting the top line but providing some upside to the bottom line as the company exits this competitive, low-margin business,” he wrote.

Cisco’s overall service provider segment rose 2%.

Switching, Cisco’s biggest bread winner, brought in $3.71 billion (representing 29% of overall revenues), up 2% year-on-year, while wireless revenues rose 7%, to $715 million.

Overall Q4 revenues reached a record $12.84 billion, up 4%, alongside earnings of 59 cents per share. Analysts were expecting 56 cents on revenues of $12.65 billion.

“While this is only my third week officially in the CEO role, we've really hit the ground running since my appointment was announced on May 4,” Cisco CEO Chuck Robbins said on the earnings call. “I believe that I'm stepping into this role at an incredible time for the company.”

Cisco shares were up $1.09 (3.89%) to $28.99 each in afternoon trading Thursday. 

Technicolor’s $600 million play for Cisco Systems’ consumer premises equipment business represents quite the bargain, as it will help Technicolor shore up share in a shrinking yet still-substantial set-top box market, reckons Futuresource Consulting.

“At $600 million, Technicolor seems to be getting a good deal – an incremental $1.2 billion in STB sales and access to key North American cable and IPTV accounts, bringing its worldwide share up to 13% (15% of Pay-TV),” Jack Wetherill, Futuresource’s senior market analyst, home electronics, said in a statement. “It also gets Cisco’s Cable Modem business to complement its own Broadband CPE unit, lifting its worldwide share up to about 15%.”

Cisco got into the set-top game almost a decade ago when it put up $6.9 billion for Scientific-Atlanta.

Futuresource said the global set-top market today is worth about $20 billion, and the deal will enable Technicolor to grab at least a 13% claim of it, along with a combined share of about 30% in the North American market.

Cisco’s total connected device sales are expected to total $1.6 billion for fiscal 2015, effectively doubling Technicolor’s Connected Home business in a full year.

That will help Technicolor achieve more scale as it braces for the pending Arris-Pace deal, which will potentially create a company with a 23% of the set-top market and apply more pressure on the smaller players, Futuresource pointed out.

On Tuesday, Pace posted first-half 2015  EBITA of $118 million, up 11% on revenues of $1.07 billion, down 5.3%. Non-CPE equipment revenues rose 34%, to $225 million. It expects full-year revenues to be in the range of $2.65 billion to $2.72 billion. Arris posts Q2 results later today.

Scale is clearly the name of the game in the eroding set-top box market. Per Futuresource, global STB shipments dropped 2%, to 274 million units in 2014, due in part to cut backs in emerging markets like Russia, Brazil, China and India.

But Futuresource’s Wetherill  does not see the bottom falling out of the set-top market, predicting that it will continue to pump out 250 million-plus units per year until 2019, and will still be worth more than $17 million by then. 

Although Arris is still fighting “headwinds” caused by MVPD consolidation paired with a consolidating and shrinking set-top market, one analyst thinks concerns about the supplier's future are a bit overblown, holding that the company remains well-positioned when it comes to the larger IP video transition.

Raymond James analyst Simon Leopold maintained his “Strong Buy” on the stock Monday, and a target price of $40 (at last check Monday, Arris shares were trading at $30.08, down 44 cents (1.44%) for the day). 

“The rapid demise of broadcast video and death of ARRIS's CPE business has been greatly exaggerated and we remain buyers of the stock,” he wrote, referring to Arris’s recently released annual Consumer Entertainment Index survey, which found that the growth/decline of OTT and traditional broadcast TV services, at +1% and -1%, respectively, being almost imperceptible at +1% and -1%.  “This seems to defy the expectations that 2015 would be a key inflection point and the start of a mass ‘cord cutting’ revolution. We see the transition of video from broadcast to IP as a gradual evolution driving product cycles and not a revolution ending the CPE market.”

In the meantime, those who are staying in the CPE business are looking to amass as much scale as possible, whether it’s Arris’s proposed merger with U.K.-based STB rival Pace Plc, Technicolor’s pending purchase of Cisco Systems’ set-top/CPE business, or even Amino’s play for Entone.

That said, he’s still confident with Arris’s long-term strategy, as “the fundamental demand for video equipment remains very healthy, driven by an inevitable structural shift in network architecture toward all IP and CCAP (converged cable access platform) along with telco video distribution.”

Arris, which recently lowered Q2 guidance, is scheduled to post financial results on Wednesday (July 29).