Comcast joins Google as Arris stakeholder

OVUM VIEW

Summary

The story continues: After announcing plans last month to acquire Motorola Home from Google subsidiary Motorola Mobility, cable infrastructure vendor Arris has now revealed that Comcast will participate in the transaction. In the end, Comcast and Google will each own 7.85% of Arris.

It is common for large deals, such as Google’s May 2012 acquisition of Motorola Mobility for $12bn, to go through further transactions. Motorola Home’s new home inside Arris makes sense. Arris is one of the leading cable industry equipment vendors. Joining forces with Motorola Home, which holds a strong position in cable customer premises equipment such as set-top boxes, propels Arris forward against its biggest competitors, Cisco and Pace.

But we can only speculate on Comcast’s involvement in the deal – whether it’s to increase influence on a key vendor, lessen concerns around Arris’s $2bn in debt, keep Motorola Home close to home, or reduce possible antitrust concerns of the US government.

Comcast has influence on Arris regardless of stock ownership

Comcast is the largest cable operator in the US and a major customer of Arris, whose sales to Comcast represented 26% of net sales in 2011 and 29% of net sales for the first nine months of 2012.

Given its revenue dependence on Comcast, Arris has been listening and will continue to listen to Comcast regardless of its ownership stake. According to Arris’s CEO, Comcast and Arris met before Arris offered to acquire Motorola Home and Comcast offered its support. We do not know what support means in this context, but let’s continue the speculation.

Comcast likely eases concerns among Arris’s shareholders and debt holders

Arris ended 3Q12 with close to $550m in cash and short-term investments and $200m in long-term debt. The purchase price for Motorola Home is $2.35bn with $2.05bn in cash, which needs to come through debt financings.

Arris’s presentation at the Needham Growth Conference in mid-January showed post-integration free cash flow of $300m. Even if the integration goes smoothly and potential synergies are achieved, Arris will have significant debt for a number of years. In addition, Arris is issuing 21.3 million in new common stock with shareholder dilution to be offset by the pro-forma post-integration financials.

As an investor, Comcast may ease concerns of Arris’s equity and debt holders. Comcast’s equity ownership, with customary provisions, likely restricts Comcast’s trading actions in the short term. Given Comcast’s commercial relationship with Arris, it is in Comcast’s best interest to see Arris thrive as a major vendor to cable operators.

Comcast likely preferred Arris as the home for Motorola Home

Press reports cited several other bidders for Motorola Home, including Pace and private equity firms. Pace, based in the UK and traded on the London Stock Exchange, sells set-top boxes, media servers, and gateway solutions to pay-TV and broadband service providers. Pace expects 2012 revenues to be around $2.4bn and its market cap is close to $1.1bn. Arris, headquartered in Georgia, reported net sales of $1.0bn for the first nine months of 2012 and is traded on NASDAQ with a market cap of around $1.9bn.

Comcast might have preferred Arris acquiring Motorola Home over Pace but either one over a private equity firm. Private equity firms have a reputation for being ruthless in trimming staff and cutting product lines to improve margins and profitability. Perhaps Comcast wanted to keep Motorola Home’s ownership under a US-headquartered company.

Comcast likely reduces potential Department of Justice antitrust concerns

Arris’s consideration for the acquisition of Motorola Home included the issuance of approximately $300m in newly issued Arris common stock shares to Google, representing around 15.7% ownership in Arris post-closing. And while these shares would be subject to customary lockup and standstill provisions and voting restrictions, 15.7% held by one shareholder is significant. Comcast’s proposed deal splits that percentage equally between itself and Google. Given Google’s track record with the US Department of Justice’s Antitrust Division, smaller ownership may ease the path for federal government approvals.

APPENDIX

Author

Julie Kunstler, Principal Analyst, Components

julie.kunstler@ovum.com

Further reading

“Arris buys Motorola Home; gains in connected home, broadband, and video infrastructure,” TE008-001278 (December 2012)

Market Share Report: 3Q12 FTTx, DSL, and CMTS, TE008-001282 (January 2013)

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