Analysts are positive on the proposed combination of CommScope Holding Co. Inc. and Arris International PLC, noting that the companies have complementary business portfolios. But they also believe the headwinds the companies faced separately — including conservative capital spending trends among major network operators — will still exist for the combined entity.
U.S. telecommunications equipment maker CommScope agreed on Nov. 8 to buy set-top box maker Arris in an all-cash transaction for $31.75 per share, or for a total purchase price of about $7.4 billion, including the repayment of debt. The deal aims to put the combined entity in a leading position in the market that supplies equipment and services for the converged wireless and wireline networks of the future.
In terms of the positives, the deal combines CommScope's experience in providing outdoor communications infrastructure to telcos with Arris' position as a vendor for cable operators such as Comcast Corp. and Charter Communications Inc. Arris provides indoor customer premises equipment such as broadband modems, routers and set-top boxes, and has also established a strong foothold in delivering enterprise network solutions through its 2017 acquisition of Ruckus Wireless Inc.
"By combining best-in-class capabilities from CommScope and Arris, we will be able to develop new comprehensive solutions that will shape the future of wired and wireless," CommScope CEO Eddie Edwards said during a Nov. 8 conference call.
He noted that the combined company will be able to offer "end-to-end solutions" for a variety of customers, regardless of whether those customers are delivering residential broadband service or connecting stadiums, hotels, train stations or major enterprises.
"Neither company has or had a complete solution across the licensed and unlicensed spectrum until now," Edwards said.
Analysts and other industry observers agree with Edwards' characterization of the deal.
"They complement each other. Given that Arris' product portfolio focuses more on the indoors and CommScope's product portfolio focuses on the outdoors," Alex Besen, founder and CEO of the mobile data consulting firm The Besen Group LLC, said in an interview.
Jeff Heynen — an analyst with Kagan, a research group within S&P Global Market Intelligence — said that from a product perspective, the deal "makes sense."
"I think when Arris made its acquisition of Ruckus, that really piqued CommScope's interest," he said, explaining that CommScope is a leader in the distributed antenna systems, or DAS, market. "That business is flattening and it's going to give way to more indoor and outdoor small cells. And that's where Arris, because of Ruckus, has a significant play, particularly in the U.S.," Heynen said.
Edwards highlighted the importance of Ruckus during the conference call, saying, "The Ruckus team will be a critical and highly complementary addition to CommScope."
Heynen, though, stressed that CommScope's acquisition of Arris is not about abandoning the former's product portfolio but rather expanding the number of options. For instance, though the DAS market is flattening, those antenna systems still remain attractive to neutral hosts like tower companies.
"If American Tower [Corp.] goes into a stadium or a larger venue and puts in this antenna system, it's much easier to lease access to the major mobile operators than it is for those operators to go in and put in their own network of small cells in those venues," Heynen said. He noted CommScope's and Arris' customers will have "the full suite to choose from" after the deal closes.
The deal, however, should not be viewed as a panacea for all the problems CommScope and Arris have faced in recent quarters. In addition to announcing the deal for Arris, CommScope also shared its third-quarter results, noting that it continued to face "challenging market dynamics."
"Our customers are taking a more conservative approach with near-term capital spending initiatives, which contributed to results coming in below our expectations," Edwards said.
CommScope reported third-quarter adjusted net income of $115 million, or 59 cents per share, versus the prior-year period's adjusted net income of $107 million, or 55 cents per share. The S&P Global Market Intelligence consensus EPS estimate for the quarter was 66 cents on a normalized basis.
Arris, too, came in below estimates, reporting preliminary net income attributable to the company of $47.1 million, or 26 cents per share, down from $88.3 million, or 47 cents per share, in the year-ago period. The S&P Global Market Intelligence consensus EPS estimate for the quarter was 67 cents on a normalized basis.
BTIG analyst Walt Piecyk said the Arris results were "below expectations," adding in a Nov. 8 blog post that his team is "building more conservatism into our [customer premises equipment, or CPE] estimates based on the accelerating sub declines at Pay TV operators and potentially rising costs from tariffs." Arris recently estimated the Trump administration's 10% tariff on Chinese imports that went into effect in September will impose approximately $200 million per year in additional costs on its equipment and devices.
"The business is challenging right now," Heynen said of Arris' CPE business, noting the falling demand the company has seen especially for set-top boxes.
Edwards acknowledged the pressure Arris has felt but said he liked the "risk/return trade-off" given the strategic position Arris' CPE provides in the home.
"Arris' CPE business has had a leading position with key customers, which can enable CommScope to cross-sell non-CPE products," Edwards said.
CommScope and Arris expect to close their deal in the first half of 2019, subject to the receipt of certain regulatory approvals and approval by Arris shareholders.