Pace buys Aurora for $310m

Pay-TV and broadband services technology specialist Pace has entered into a conditional agreement with advanced, next-generation Optical Transport and Access Network solutions provider Aurora Networks to acquire the company in a $310 million cash deal that it says will strengthen Pace’s position as a market-leading solutions provider for the Pay-TV and broadband industries.

According to Pace, the Strategic Rationale for the acquisition is:

Positions Pace to support operators’ and consumers’ constant demand for cost effective delivery of ever increasing bandwidth

Highly profitable and growing business with blue chip customer base and market leading positions, serving over 200 customers in 50 countries, including all of the top 10 cable operators in the US

Strong management team that has delivered 30 straight quarters of profitability

Creates deeper and more embedded relationships with key customers

Cross-sell opportunity across customer footprints

Further widens Pace out beyond Pay-TV Customer Premise Equipment (‘CPE’)

Interms of Financial Rationale, Pace says the deal is:

Significantly accretive to earnings in 2014 and accelerates Pace towards improved profitability target of 9 per cent Return on Sales in 2015

Expected to generate annual run rate cost synergies across CoGs and Opex of $8m by the end of 2014

The headline consideration represents a historic EV/EBITDA4 multiple of 10.5x before synergies and 8.2x after expected annual run rate synergies, based on the results of Aurora for the 12 months to 31 March 2013

Opportunity to apply robust Pace working capital controls to deliver significant working capital benefits

Following completion of the Acquisition Pace expects to be conservatively levered and retain significant financial flexibility

Commenting on the Acquisition, Allan Leighton, Chairman of Pace, said: “Since the announcement of the Pace Strategic Plan on 17 November 2011, we have consistently delivered on it, achieving almost all of the milestones and targets laid out at that time and there remains significant opportunity for development of the core business. The acquisition of Aurora represents an important evolution in this process and enhances our strategy to grow a broader platform across Hardware, Software and Services. Acquiring Aurora will allow Pace to expand beyond our core business and build deeper and more embedded relationships with our customers, which the Company believes will strengthen Pace’s position as a market leading solutions provider for the Pay-TV and broadband industries.”

Mike Pulli, CEO of Pace, said: “Following a strong first half in 2013, good progress has been made in the period with continued momentum across the business. I am pleased to be able to announce the acquisition of Aurora. Aurora is a leading player in the pivotal area of Optical Transport and Access Network solutions, with a complementary overlap to Pace’s blue-chip customer base and a strong and seasoned team of talented and innovative cable industry professionals. With a leading presence in products that are increasingly important for cable operators as they fulfil consumers’ constant demand for ever increasing bandwidth, this transaction further strengthens our relationships with our customers. The combined business will have strong financials and a broad market leading portfolio that will provide excellent opportunities for our customers, employees and shareholders alike.”

Guy Sucharczuk, CEO of Aurora, said that joining with Pace would create a market leading Pay-TV and broadband solution portfolio and a leading solutions provider to operators globally. “The management team and I are excited to be joining and believe the combined organisation will go from strength to strength.”

Pace will acquire Aurora for headline consideration of $310 million on a cash-free and debt-free basis, plus a further $13 million payable on closing in connection with tax benefits to be recovered over the three years post Acquisition. Fifteen per cent of the headline consideration will be reserved for existing Hockey management and employees, with an element deferred over two years as a retention mechanism for key management, who will also be eligible to participate in a post-acquisition incentive plan.

The consideration for the Acquisition will be satisfied by the payment of cash on completion, funded through a new $310 million five-year amortising Term Loan. In addition, the Company is using the Acquisition as an opportunity to refinance its existing debt facilities with a new $150 million five-year Revolving Credit Facility. The new financing facilities are being provided by HSBC and RBS as Joint Underwriters, Bookrunners and Mandated Lead Arrangers with JPMorgan Chase Bank, N.A as Lead Arranger.

Following completion of the Acquisition, Aurora will continue to be run by its existing senior management team. Pace recognises the importance of the skills and experience of the existing management and employees of Aurora and believes that they will be an important factor for continuing the success of Aurora’s business under Pace ownership. Aurora will operate as a Strategic Business Unit (“SBU”) of Pace, leveraging Pace Group common services, whilst retaining the Aurora brand and managing a separate P&L to retain focus and accountability for business performance.

Pace will put in place appropriate retention and incentivisation arrangements for key management. The incentive arrangements will have a performance element based on the achievement of Aurora adjusted EBITA targets for 2014 and 2015, to be satisfied with a combination of cash and/or Pace deferred share awards under existing Pace employee share plans. The retention and incentive arrangements will span over a period of three years.

The consideration for the Acquisition is subject to normal post-closing cash, debt and working capital adjustments.

Closing of the Acquisition is conditional upon the satisfaction of necessary regulatory and other conditions. The Acquisition constitutes a Class 1 transaction under the UK Listing Rules and is therefore conditional upon the approval of Pace shareholders.

A circular containing further details of the Acquisition will be sent to Pace shareholders in due course, together with a notice convening a General Meeting to seek shareholder approval for the Acquisition. Closing is expected to take place around the end of Q4 2013.

J.P. Morgan Cazenove is acting as sole financial adviser, sponsor and corporate broker to Pace.

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