With their respective operator client bases consolidating, and each facing expensive transitions to next-generation wireless technology product lines, two struggling telecom vendor giants joined forces last week.
In a deal valued at $7.4 billion, financing included, Hickory, N.C.-based CommScope purchased Suwanee, Ga.-headquartered Arris. The pact combines two vendors of roughly the same girth; each is market-capped around $5 billion. At $31.75 a share, CommScope paid a 14% premium for Arris.
The deal is expected to close in the first half of next year. CommScope will be in charge of the combined company, but Arris CEO Bruce McClelland and his management team, as well as the Suwanee office, will remain in the fold. Private-equity giant The Carlyle Group has invested $1 billion into CommScope to finance the deal in exchange for a 16% stake. It will have two seats on the board when the deal closes.
The combined company should generate estimated annual revenue of around $11.3 billion and EBITDA of around $1.8 billion.
Both CommScope and Arris are selling the deal on the notion that they sell complementary network components for technologies like Citizens Broadband Radio Service (CBRS). Analysts tend to agree, but actual stock buyers remain skittish — evidenced by CommScope’s 20-plus percent slide on Wall Street in the aftermath of the announcement.
Certainly, both companies could use a boost.
Arris spent lots of money over the last six years bulking up in the pay TV set-top business, acquiring Motorola Mobility’s customer premises equipment division (formerly General Instrument) for $2.35 billion. In 2015, it gobbled up No. 2 set-top supplier Pace out of the UK for $2.1 billion. With large operator clients like Comcast looking to phase out of full-service pay TV set-tops, and milk the last life out of those they have in the market, Arris is looking to transition, evidenced by its $800 million purchase of Ruckus Wireless last year. But around 35% of its revenue still comes from the fading set-top business.
Shortly after the deal was announced, Arris reported a 4.5% third-quarter revenue decline to $1.651 billion.
CommScope is looking to transition into 5G connectivity products, as well, but it’s struggling in the here and now of the mature 4G era (although sales were up 2% in the third quarter to $1.15 billion).
BTIG Research analyst Walter Piecyk estimated that the combined companies could realize $300 million to $450 million in annual cost synergies.
Edwards conceded that the North American pay TV set-top business is in decline. “But it is a good cash generator, so that’s something that doesn’t scare us,” he added. “We have managed a lot of businesses for cash in our past.”
It turns out CommScope and Arris have been together before. Here’s a timeline showing how, in a complex series of deals spanning 21 years, CommScope just paid $7.6 billion for assets it had previously been connected to.
1997: Horsham, Pa.-based General Instrument (GI), which specializes in semiconductors and other cable and satellite TV electronics hardware, splits into three companies: General Semiconductor, Next Level Systems and CommScope.
1998: Next Level Systems, which houses the former GI’s cable and satellite set-top business, changes its name to GI Corp.
2000: Motorola pays $17 billion for GI. Combined with Zenith Communications assets, GI will be the foundation of a unit that will ultimately be rebranded as Motorola Mobility.
2001: Google buys Motorola Mobility for $12.5 billion.
2012: Arris pays $2.35 billion for Motorola Mobility’s Home division, which houses the former GI assets.
2018: CommScope pays $7.6 billion to buy Arris.
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