CommScope has inked a deal to buy telecommunications equipment maker Arris in an all-cash deal valued at $7.4 billion.
After years of being the biggest fish in wireless and wireline deals, Arris was gobbled up by CommScope, which is now one of the biggest fish in the telecommunications sea.
The rumor mill has worked overtime on news of a pending deal with CNBC reporting earlier this week that it could be consummated as early as Wednesday. Thursday's announcement came on the heel of Arris reporting its third-quarter results.
CommScope is paying Arris shareholders $31.75 a share—a 14% premium over Arris' closing price yesterday—and has agreed to payoff Arris' debt. CommScope plans on financing the acquisition via a combination of cash and borrowings.
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"It's financial engineering from either side," said Lee Doyle, principal analyst at Doyle Research, in an interview with FierceTelecom. "I can see both sides of it where CommScope is looking at cable as a good market where it can be a strong player with a broader portfolio.
"There has been a lot acquisition and divesture in cable. Look at Cisco. Arris has more than doubled its size via acquisitions and now it's looking at is it better to use its cash elsewhere? There are only a small number of big cable companies left, such as Comcast. Cable operators are trying to wring as much as they can out of customer premise equipment, or set-top boxes, as possible," Doyle said.
The combination of CommScope and Arris, on a pro forma basis, would create a company with approximately $11.3 billion in annual sales and adjusted EBITDA of approximately $1.8 billion, based on results for the two companies for the 12 months ended Sept. 30, 2018.
CommScope said the transaction was expected to be more than 30% accretive to its adjusted earnings per share by the end of the first full year after the deal closes. It also said the combined company would generate about $1 billion in cash flow.
“After a comprehensive evaluation of our business and the evolving industry we operate in, we are confident that combining with Arris is the best path forward for CommScope to grow and provide the greatest returns for shareholders,” said CommScope CEO and President Eddie Edwards, in a statement. “CommScope and Arris will bring together a unique set of complementary assets and capabilities that enable end-to-end wired and wireless communications infrastructure solutions that neither company could otherwise achieve on its own. With Arris, we will access new and growing markets, and have greater technology, solutions and employee talent that will provide additional value and benefit to our customers and partners."
Edwards also said that the two companies shared a "customer-first culture" and that based on previous CommScope acquisitions he expects a seamless integration of Arris.
“CommScope is an ideal partner for Arris," Arris CEO Bruce McClelland said in a prepared statement. "In addition to providing immediate and substantial cash value to our shareholders, we are excited for what this combination will deliver for our customers, partners and employees around the world. Today’s agreement is a testament to the strength of Arris: our leading technology, talented employees and established competitive position. With CommScope, we expect to further advance Arris’ strategy to drive innovation across our iconic brands and pioneer the standards and pathways for tomorrow’s personalized, connected always-on consumer experience.
"Arris will become part of an even stronger, more global industry leader, and I look forward to working with the CommScope team to achieve great results for the combined company.”
CommScope said in its press release that the combined company is "expected to drive profitable growth in new markets, shape the future of wired and wireless communications, and position the new company to benefit from key industry trends, including network convergence, fiber and mobility everywhere, 5G, Internet of Things and rapidly changing network and technology architectures."
Arris brings its customer premise equipment, which includes access devices such as broadband modems, gateways and routers as well as video set-top boxes, into CommScope's product line. Arris also has a network and cloud division that combines broadband and video infrastructure with cloud-based software solutions.
Arris' enterprise networks division includes the recently acquired Ruckus Wireless and ICX Switch businesses for wireline and wireless connectivity. Arris' line up includes citizens band broadband radio service solutions, which overlaps CommScope's product line to a degree.
CommScope has secured financial commitments from J.P. Morgan Securities LLC, Bank of America Merrill Lynch and Deutsche Bank Securities LLC.
In addition, The Carlyle Group has reestablished an ownership stake in CommScope through a $1 billion minority equity investment as part of CommScope’s financing of the transaction. CommScope was taken public in 2013 by The Carlyle Group, which has a long list of telecommunications-based investments and ownerships.
Once the deal passes regulatory muster, it's expected to close in the first half of 2019. Edwards will helm the joint company, which will remain headquartered in Hickory, North Carolina. Arris’ CEO Bruce McClelland is expected to stay on but CommScope didn't say what his role would be.