A delay in Arris’s proposed $2.1 billion merger with Pace plc isn’t a “show stopper,” as Arris has “viable options to modify the deal” that could alleviate concerns raised by the U.S. Department of Justice, Raymond James analyst Simon Leopold said in a research note released Monday.
Arris announced on Friday (October 17) that the deal might not close until late December or the first quarter of 2016 amid additional requests from the Antitrust Division of the DoJ and regulators in Brazil and Colombia. Arris said the Antitrust Division’s focus appears to be on their optical transmission products, which include node equipment. Pace strengthened its position in this area in 2013 when it acquired Aurora Networks for $310 million.
“We do not consider the optical transmission products as the primary focus for ARRIS' Pace acquisition and believe options exist to consummate a transaction,” Leopold wrote. “We see the sale of the Pace transmission unit as the most logical scenario.”
He said possible buyers could include CommScope, Harmonic and Casa Systems, with Emore and Applied Optoelectronics and Ericsson to be among those “less likely” to make a play for the Pace unit.
“Although we are uncertain if the unit would be divested in its entirety, we imagine it might be valued near 1x sales or $300-$350 million,” Leopold added.
The divestiture of the networks business of Pace, he said, would bring the combined CY16 sales estimate to $7.48 billion, down from $7.80 billion, and earnings per share to $3.27, versus $3.41, with accretion of $0.51, down from the analyst’s prior $0.66 estimate.
Leopold maintained a “strong buy” rating on Arris as well as his $41 target price on the stock.
Regulators in Portugal, Germany and South Africa have already cleared the Arris-Pace agreement.
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