Broadband access network technology supplier ARRIS Group, Inc. (NASDAQ: ARRS) has agreed to acquire UK-based Pace plc (LSE: PIC) for $2.1 billion (£1.4 billion) in cash and stock. While Pace is best known for its set-top boxes, the company also has fiber to the home (FTTH) equipment in its portfolio.
Under terms of the agreement, ARRIS will form a new company current called, appropriately, "New ARRIS." The new entity, incorporated in the UK but headquartered in ARRIS's home of Suwanee, GA, will issue new stock, which will be exchanged for current ARRIS common shares. (The new company will remain listed on NASDAQ as ARRS.) Pace shareholders will then be offered £1.325 in cash ($1.99) and 0.1455 New ARRIS shares for each share of Pace they own. The aggregate £4.265 per share ($6.42) represents a 28% premium on Pace's closing share price on April 21, 2015. The Pace shareholders will end up owning 24% of the combined company.
ARRIS plans to fund the cash portion of the deal via a combination of cash on hand and debt, in the form of a fully committed facility from Bank of America Merrill Lynch.
The U.S. company expects the deal to be $0.45 to $0.55 accretive to non-GAAP earnings per share in the first 12 months after completion of the deal. ARRIS believes the transaction will close late this year.
Current ARRIS Chairman and CEO Bob Stanzione will retain those titles in the new company, and the then-current ARRIS board of directors also will remain in place. What roles, if any, Pace management will play in the new company were not revealed.
Pace is a major player in the set-top box and residential gateway market, with boxes for cable TV, IPTV, and satellite TV service provision. This last area in particular caught the eye of ARRIS management.
"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," said Stanzione via the press release announcing the proposed deal.
However, Pace also plays in the FTTH field, thanks to its 2013 acquisition of Aurora Networks (see "Pace trumps competition to acquire Aurora Networks"). Aurora specializes in fiber-optic broadband equipment for cable operators, and itself acquired PON gear from Enablence Technologies in 2011 (see "Aurora Networks buys Trident7 PON line from Enablence Technologies"). ARRIS already offers a range of complementary optical networking equipment, include nodes and hubs that support PON and RF over glass topologies.
Market research firm Synergy Research Group estimates that, should the deal go through, New ARRIS would dominate the client hardware market, as ARRIS currently is Number 1 and Pace is Number 2. The combined company also would move to the second spot in video infrastructure overall, narrowly trailing Cisco, 18% to 17%.
"It is just two years ago that ARRIS completed the acquisition of Motorola Home, and it is now making a huge statement by announcing the proposed acquisition of Pace," said John Dinsdale, a chief analyst and research director at Synergy Research Group. "Cisco has some real strength and depth on the network and software sides of the market, but client hardware has proven to be an Achilles heel for it and ARRIS is clearly determined to totally own that part of the video market. Coming so soon after the Motorola deal it is also a bold statement of faith in the ability of ARRIS to integrate large and complex acquired companies."
For more information on FTTx equipment and suppliers, visit the Lightwave Buyer's Guide.
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