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Analyst Ups CommScope Target Price On M&A Action

Believing that the potential synergies outweigh the execution risks in CommScope’s $3 billion play for a big piece of TE Connectivity, Raymond James analyst Simon Leopold raised his price target on CommScope shares to $30 from $25.

Following an earlier report in The Wall Street Journal, CommScope and TE announced the all-cash deal on Wednesday, with CommScope agreeing to acquire TE Connectivity’s telecom, enterprise and wireless businesses.

Billing it as a “transformative acquisition,” CommScope said the addition of the TE assets will enable it to accelerate its move into adjacent markets and expand its global presence. The portion of TE being picked up generated annual revenues of about $1.9 billion in the fiscal year ended Sept. 26, 2014.  CommScope expects to close the deal before the end of the year.

CommScope’s shares soared on the news, eventually settling down and closing at $27.13, up 6.10%, on Wednesday.

Leopold, who maintained his Outperform rating on the stock, said in a research note issued Thursday: “Although the deal presents execution risk and increased debt burden, we believe management can derive synergies and deliver improved earnings. We continue to like the shares and remain buyers following the announced transaction.”

CommScope, a key supplier of broadband gear to cable operators, said it expects the deal to be in excess of 20% accretive to its adjusted earnings per share by the end of the first full year after closing, and envisions more than $150 million in annual synergies starting in the third year after closing, and more than $50 million in the first full year.

With the TE assets factored in, it would have driven $5.8 billion in net sales and $1.2 billion pro forma adjusted EBITDA for the twelve months ended  Sept. 30, 2014.

Based on those figures, CommScope said overall sales concentration would be more balanced and diversified:

-Wireless: 46% of sales, versus 65%.

-Enterprise : 26% of sales, versus 22%.

-Broadband connectivity: 28% of sales, versus 13%.

CommScope said its corporate headquarters will remain in Hickory, N.C.

Allen & Company LLC, J.P. Morgan Securities LLC, BofA Merrill Lynch and Deutsche Bank are serving as financial advisors to CommScope.  Alston & Bird LLP, Latham & Watkins LLP, Baker & McKenzie and Jones Day are serving as legal advisors to CommScope.