Communications company Commscope (COMM 19.95, -4.54, -18.5%)
announced this morning the acquisition of fellow comm peer ARRIS International
(ARRS 30.67, +2.88, +10.4%) in an all-cash deal worth a reported $7.4 bln, with
cost synergies and top and bottom line accretion which were too good for the
North Carolina-based company could pass up.
As is typical, Commscope, the acquiring company, is trading down today – to its lowest levels in the last two-and-a-half years, in fact – after announcing it would acquire ARRIS International in an all-cash transaction for $31.75 per share, or a total purchase price of approximately $7.4 bln, including the repayment of debt. The combined company is expected to benefit from key industry trends, including network convergence, increased fiber and mobility deployment, 5G, Internet of Things, and rapidly changing network and technology architectures.
As a result of the combined company’s increased scale, CommScope expects to achieve annual run-rate cost savings of at least $150 mln within three years post-close, with synergies of more than $60 mln expected to be realized in the first full year after closing and more than $125 mln expected to be realized after the second year post-close, driven from natural synergies primarily in direct procurement and SG&A.
The transaction is expected to be more than 30% accretive to CommScope’s adjusted earnings per share by the end of the first full year after closing, excluding purchase accounting charges, transition costs, and other special items. The combined company is expected to generate approximately $1 bln in cash flow from operations in the first full year after closing. Upon completion of the transaction, CommScope’s net leverage (debt less cash) ratio based on pro forma adjusted EBITDA for the 12 months ended September 30, 2018 is expected to be 5.1x, including full run-rate synergies of $150 mln. Given the increased scale and cash flow generation, as well as both companies’ track records of successful integration, CommScope expects to rapidly de-lever, targeting a net leverage ratio of approximately 4.0x in the second full year after closing. Long term, the company is targeting a net leverage ratio of 2.0x to 3.0x.
The deal is expected to close in the first half of 2019 and is not subject to a financing condition. Following completion of the combination, Eddie Edwards will continue in his role as President and CEO of CommScope, with Bruce McClelland and other members of the ARRIS leadership team joining the combined company.
In addition, Carlyle Group (CG 21.24, +0.24, +1.1%) has reestablished an ownership position in CommScope through a $1 bln minority equity investment as part of CommScope’s financing of the transaction.
Also, this morning both ARRIS and Commscope announced quarterly results. ARRIS reported a mixed-bag third quarter with profit of $0.68 per share beating market expectations while sales declines of 4.5% to $1.65 bln were worse than expected. The company also issued downside guidance for the fourth quarter in the way of expected EPS of $0.68 with revenues of about $1.651 bln. Commscope fared just a badly this quarter, delivering Q3 EPS and revenues which both missed market expectations at $0.59 and $1.15 bln, respectively. Commscope’s Q4 guidance was equally weak as the company sees EPS of $0.34-0.39 on revenues between $1.015-1.065 bln noting the company overall expects modest growth in 2019, reflecting the impact of adverse spending patterns at large North American operators.
The rhetoric from Commscope management is that the ARRIS deal is attractive in the long run – it enables the combined company to address more markets while allowing for cost savings and positioning the combined company well to capitalize on industry trends. The deal seems to be a play on just that – the long-term. With COMM’s shares down about 47% YTD, inclusive of today’s move, shareholders who’ve hung around this long perhaps have turned their eye toward the long-term as the company is attempting a turnaround of what have been soft industry trends of late.
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