CommScope acquiring ARRIS, to emerge as $11.3B wired, wireless, video communications infrastructure giant

CommScope (NASDAQ: COMM), a specialist in infrastructure solutions for communications networks, has agreed to acquire ARRIS International plc (NASDAQ: ARRS), a global leader in entertainment and communications solutions, in an all-cash transaction for $31.75 per share, or a total purchase price of approximately $7.4 billion, including the repayment of debt.

Per a press statement, the combination of CommScope and ARRIS, on a pro forma basis, creates a company with approximately $11.3 billion in revenue and adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) of approximately $1.8 billion, based on results for the two companies for the 12 months ended September 30, 2018. Via the acquisition, the combined companies expect to achieve more than $150 million in annual cost synergies within three years. The companies assert the transaction more than doubles their expected combined product addressable market to greater than $60 billion.

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Notably in addition, The Carlyle Group, a global alternative asset manager, has reestablished an ownership position in CommScope through a $1 billion minority equity investment as part of CommScope’s financing of the transaction.

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, an innovator in broadband, video and wireless technology, combines hardware, software and services to enable advanced video experiences and constant connectivity across a variety of environments – for service providers, commercial verticals, small enterprises and the people they serve. ARRIS has strong leadership positions in the three segments in which it operates:

Customer Premises Equipment (CPE), featuring access devices such as broadband modems, gateways and routers and video set-tops and gateways;
Network & Cloud (N&C), combining broadband and video infrastructure with cloud-based software solutions; and
Enterprise Networks, incorporating the recently acquired Ruckus Wireless and ICX Switch businesses, and focusing on wireless and wired connectivity, including Citizens Broadband Radio Service solutions.

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For the 12 months ended September 30, 2018, ARRIS generated revenues of approximately $6.7 billion, consisting of $3.9 billion from CPE, $2.2 billion from N&C and $568 million from Enterprise Networks (reflecting only a partial year of Ruckus since its acquisition in December 2017).

“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 Eddie Edwards, president and chief executive officer, CommScope. “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.

“CommScope and ARRIS share a customer-first culture that emphasizes innovation, made possible by incredibly talented and experienced teams of people. As we have with numerous transactions in the past, we expect to work together with Bruce McClelland and the ARRIS team to create a best-in-class management team and achieve a seamless integration. Together, CommScope and ARRIS will be well positioned to serve a more diverse set of customers and generate substantial value for our shareholders.”

ARRIS Chief Executive Officer Bruce McClelland said, “CommScope is an ideal partner for ARRIS. 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.”

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Additional details per the transaction's official press announcement by CommScope are as follows:

Transaction is a critical step in fueling growth, shareholder value and customer benefits:

Positioned to Capitalize on Positive Industry Trends: The combined company will be well positioned to benefit from key industry trends by combining best-in-class capabilities in network access technology and infrastructure and creating end-to-end and comprehensive solutions. We believe trends such as network convergence, fiber and mobility everywhere, the advent of 5G and fixed wireless access, Internet of Things and rapidly changing network and technology architectures will provide compelling long-term opportunities for the combined company and its unique end-to-end communications infrastructure capabilities.

Unlocks Significant, High-Growth Segments and Increases Product Addressable Market: The company expects to more than double its total product addressable market to more than $60 billion, with a unique set of complementary assets and capabilities that enable end-to-end communications infrastructure solutions such as:
- Converged small cell solutions for licensed and unlicensed wireless spectrum;
- Complementary wired and wireless communications infrastructure;
- Integrated broadband access;
- Private network solutions for industrial, enterprises and public venues; and
- Comprehensive connected and smart home solutions.

Expanded Product Offerings and R&D Capabilities to Meet Diversified Customer Base: CommScope and ARRIS will share strong technical expertise with approximately 15,000 patents and approximately $800 million in average annual research and development investments. With a stronger global footprint, the combined company is expected to serve customers across more than 150 countries.

Strong Financial Profile with Cost Savings Opportunities: For the 12 months ended September 30, 2018, on a pro forma basis, the combined company would have generated revenues of approximately $11.3 billion with adjusted EBITDA of approximately $1.8 billion. As a result of the combined company’s increased scale, CommScope expects to achieve annual run-rate cost savings of at least $150 million within three years post-close, with synergies of more than $60 million expected to be realized in the first full year after closing and more than $125 million expected to be realized after the second year post-close, driven from natural synergies primarily in direct procurement and SG&A.

Significantly Accretive to CommScope’s Earnings: The transaction is expected to be more than 30 percent 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.

Maintains CommScope’s Strong Balance Sheet, Credit Position and Financial Flexibility: With a unique set of complementary assets and capabilities that enable end-to-end communications infrastructure solutions, the combined company is expected to generate approximately $1 billion in cash flow from operations¹ 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 EBITDA¹ for the 12 months ended September 30, 2018 is expected to be 5.1x, including full run-rate synergies of $150 million. 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.

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Terms and Financing

The per share cash consideration represents a premium of approximately 27 percent to the volume weighted average closing price of ARRIS’ common stock for the 30 trading days ended October 23, 2018, the day prior to market rumors regarding a potential transaction.

The transaction is not subject to a financing condition. CommScope expects to finance the transaction through a combination of cash on hand, borrowings under existing credit facilities and approximately $6.3 billion of incremental debt for which it has received debt financing commitments from J.P. Morgan Securities LLC, BofA Merrill Lynch and Deutsche Bank Securities Inc.

In addition, The Carlyle Group, a former CommScope owner, is reestablishing a minority ownership position in the company through a $1 billion equity investment, equal to approximately 16 percent of CommScope’s outstanding shares.

“We are delighted to resume our collaboration with CommScope’s accomplished management team,” said Cam Dyer, Carlyle managing director and global co-head of Technology, Media and Telecom. “We believe in the company’s long-term strategy, customer-centric culture and ability to deliver results. This optimism has fueled our desire to be a part of such a promising transaction with ARRIS.”

Leadership and Headquarters

Following completion of the combination, Eddie Edwards will continue in his role as president and chief executive officer of CommScope, with Bruce McClelland and other members of the ARRIS leadership team joining the combined company.

CommScope will remain headquartered in Hickory, NC, and the combined company will maintain a significant presence in Suwanee, GA. Upon completion of the transaction, CommScope will continue to be led by an experienced board of directors and management team that leverage the strengths of both companies.

Approvals

The transaction, which is expected to close in the first half of 2019, is subject to the satisfaction of customary closing conditions; expiration or termination of the applicable waiting period under the US Hart-Scott-Rodino Antitrust Improvements Act; receipt of certain regulatory approvals; and approval by ARRIS shareholders.

Advisors

Allen& Company LLC, Deutsche Bank, J.P. Morgan Securities LLC, and BofA Merrill Lynch are serving as financial advisors to CommScope, and Alston & Bird LLP, Latham & Watkins LLP, Cravath, Swaine & Moore LLP, Pinsent Masons LLP and Skadden, Arps, Slate, Meagher & Flom LLP are serving as legal counsel. Evercore is serving as financial advisor to ARRIS. Troutman Sanders LLP, Herbert Smith Freehills LLP and Hogan Lovells LLP are serving as legal counsel to ARRIS. Simpson, Thacher & Bartlett LLP is serving as Carlyle’s legal counsel.

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