CommScope revealed plans to spin off its Home Networks business into an independent company as part of a previously announced initiative aimed at cutting costs and refocusing investment on core markets.
Chuck Treadway, CommScope CEO, said in a statement a review of its assets initiated for the cost-cutting program made “clear that the Home Networks business’ distinct strategy, growth characteristics, investment requirements and returns on invested capital are not aligned with the rest of our portfolio.”
He said CommScope concluded the division would be “better positioned to deliver superior home and consumer-oriented products” as a standalone entity with a dedicated R&D and sales teams.
The consumer premises equipment-focused Home Networks division was created at the start of 2020, when CommScope restructured following its $7.4 billion acquisition of broadband equipment manufacturer Arris, which closed in April 2019.
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CommScope noted in a press release the spin off will help reduce complexity within the company and offer greater opportunities to expand its margins. It expects the transaction to close by the end of Q1 2022.
Once it is complete, CommScope will comprise Broadband Networks, Outdoor Wireless Networks, and Venue and Campus Networks divisions.
Analysis
For the full year 2020, CommScope posted a net loss of $573.4 million on revenue of $8.4 billion. Revenue for the Home Networks division was down 30.3% year over year to $2.4 billion, outpacing year-on-year losses in the company’s Outdoor Wireless Networks (15.7%) and Venue and Campus Networks (7.1%) businesses. Its Broadband Networks unit was the only one to make gains, growing revenue 3.1% to $2.9 billion.
In an interview with Fierce, Lee Doyle of Doyle Research said CommScope has “grown quite a bit via acquisition” in recent years, but argued “there’s not a lot of synergies” between its broadband, cellular wireless and home businesses. He highlighted the recent losses in the Home Networks division, adding “Clearly they’re trying to make some financial moves…I think they’re cutting their losses on the Arris thing.”
Moor Insights and Strategy Senior Analyst Will Townsend told Fierce he believes the spin off is a “smart move” given CommScope’s recent financial challenges. He added “the consumer and enterprise markets are radically different…thus you can't apply a one-size-fits-all approach especially from a roadmap/development perspective. However, they may have been better served to find a buyer for their consumer portfolio and double down on enterprise given the margin and profit pools are richer.”
More cuts on the way
The company unveiled its CommScope Next cost-cutting program during its Q4 2020 earnings call in February, outlining plans to cut costs, boost growth and optimize business operations.
At the time, Treadway said the company was targeting “unproductive investments that could provide us with additional financial flexibility to reallocate development funds to higher-return projects,” according to a transcript.
In a statement accompanying the spin off announcement Treadway said the company expects “cost reduction actions we are taking in core CommScope to, at a minimum, offset Home Networks’ adjusted EBITDA and create savings we can reinvest in our business, which should result in post-spin leverage within core CommScope at no more than current levels.”
He noted efforts to slash spending and thin out its portfolio “will continue to be our priorities,” adding “we are moving quickly to streamline costs.”