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ARRIS buys Pace for $2.1bn

In a further consolidation of the broadband and pay-TV technology sector, ARRIS is buying Pace for $2.1 billion (€1.96 billion) in cash and stock. The acquisition is expected to be accretive to ARRIS Non-GAAP earnings per share in the first 12 months following the acquisition. Arris acquired the Motorola Home business from Motorola Mobility in December 2012 for $2.35 billion in a cash-and-stock transaction

The transaction will result in the formation of New ARRIS, which will be incorporated in the UK, and its operational and worldwide headquarters will be in Suwanee, GA USA. New ARRIS is expected to be listed on the NASDAQ stock exchange under the ticker ARRS. In connection with the formation of New ARRIS each current share of ARRIS will be exchanged for one share in New ARRIS.

Under the agreed upon terms, Pace shareholders will receive £1.325 of cash and a fixed exchange ratio of 0.1455 New ARRIS shares for each Pace share, reflecting aggregate consideration as of April 21, 2015 of £4.265 per share, representing a 28 per cent premium to the Pace closing share price as of April 21, 2015. The cash portion will be funded through a combination of cash and debt. ARRIS has secured a fully committed facility from Bank of America Merrill Lynch to meet the funding requirements.

Pace shareholders will receive approximately 48.2 million shares of New ARRIS in aggregate. On a pro forma basis current ARRIS shareholders will hold ~76 per cent of New ARRIS and Pace shareholders will hold ~24 per cent of New ARRIS. The transaction is expected to be taxable, for US federal income tax purposes, to the shareholders of ARRIS

The proposed transaction has been approved by the respective Boards of Directors of ARRIS and Pace and is expected to close in late 2015 after the satisfaction of customary closing conditions, including ARRIS and Pace shareholder approval and regulatory approvals.

ARRIS Chairman and CEO, Bob Stanzione will be New ARRIS Chairman and CEO and the then-current ARRIS Board of Directors will serve as the New ARRIS Board of Directors.

“This transaction is another example of ARRIS’s ongoing strategy of investing in the right opportunities to position our company for growth. Adding Pace’s talent, products and diverse customer base will provide ARRIS with a large scale entry into the satellite segment, broaden our portfolio and expand our global presence. We expect this merger will enable ARRIS to increase its speed of innovation. We believe this is a tremendous opportunity for ARRIS and our customers, employees, shareholders and partners around the world as we collaborate to invent the future,” said Bob Stanzione. “We look forward to working with the talented and accomplished team at Pace.”

“Pace plc is a great company with a strong track record of pioneering innovation and excellent customer service. Through a combination of organic development and acquisitions, Pace has grown to be a leading technology solutions provider to the pay-TV and broadband industries serving cable, satellite and telco customers across the globe. Over the last three years, Mike Pulli and the wider Pace team have successfully executed against our strategic plan to develop Pace into a more distinctive, profitable and cash generative company, creating significant value for shareholders.

“The Pace Directors believe that ARRIS’s offer recognises this value and also gives our shareholders the opportunity to share in the future success of the combined group. While we believe that Pace is strongly positioned to continue to execute its strategy in the medium and long term, we believe that the combination of the complementary ARRIS and Pace businesses will create a platform for future growth above and beyond our standalone potential. We believe this is a great fit for both companies, our employees, customers and trading partners,” said Allan Leighton, Chairman of Pace.

Ironically, when ARRIS acquired the Motorola Home business from then owner Google, it beat off interest from Pace and Technicolor and private equity concerns. In August 2012, Google hired Barclays to seek buyers for the unit, which had been losing market share to players such as Pace. Motorola tried unsuccessfully to sell the business in 2009 for $4.5 billion. The emergence since then of devices such as Apple TV and Roku was widely expected to drive the price tag lower.

As Daniel Simmons, the Director of Connected Home Analysis at IHS Technology points out, ARRIS’s acquisition of Pace will create the world’s largest supplier of set-top box (STB), broadband gateway and cable TV technology. Combined 2014 revenues of $7.9 billion make it twice the size of its nearest competitor, Cisco’s Service Provider Video business unit. ARRIS’s business is largely US-cable-TV-centric and its recent growth is a direct result of its Motorola Home acquisition.

“Future growth for ARRIS critically depends on it expanding outside of the US, where its current growth opportunity is limited by a stagnating pay TV market. Pace will bring ARRIS an expansion of width and scale that would be difficult for it to achieve organically. Pace has a large portfolio of high-value pay TV operator clients in EMEA and APAC, a large scale satellite STB business, a strong play in DSL gateways, and a long-standing relationship with DirecTV; all things ARRIS currently lacks,” he advises.

“However, Pace’s STB and broadband gateway business slowed in 2014, and is indicative of a global slowdown in this sector and reflected in ARRIS’s USD 2.1 billion offer, which effectively values Pace at 80 per cent of its 2014 revenue. It’s likely that we’ll see further consolidation in this sector in the near future, with the value of the STB industry expected to fall from $22.7 billion in 2014 to $18.8 billion by 2019,” he suggests.

“ARRIS’s largest opportunity will come from supplying the combined customer base of pay TV operators with products and solutions that help them succeed against competition from Over the Top (OTT) video and television providers such as Apple and Netflix. It will also help them succeed against the competition from content creators looking to use OTT as a means of bypassing pay TV to go direct to consumer. These solutions will only partially include STBs and will place greater emphasis on network and cloud technologies as well as software designed to optimise the user experience. The need to include these elements in a modern TV platform will drive ARRIS and its competitors to make further acquisitions,” he predicts.

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