Set-top box makers Arris and Pace have agreed to merge. Arris will acquire Pace for a total stock and cash consideration of USD 2.1 billion. The transaction will result in the formation of New Arris, which will be incorporated in the UK, and its operational and worldwide headquarters will be in Suwanee, Georgia. New Arris is expected to be listed on the Nasdaq stock exchange.
Each current share of Arris will be exchanged for one share in New Arris. Pace shareholders will receive GBP 1.325 of cash and 0.1455 New Arris shares for each Pace share, giving them a total 24 percent of the new company. The price is a premium of 27.6 percent on the Pace share price the day prior to the announcement and values the company at 8.2 times annual adjusted EBITDA. The cash portion will be funded through a combination of cash and debt. Arris has secured a fully committed facility from Bank of America Merrill Lynch to meet the funding requirements.
The proposed transaction has been approved by the respective Boards of Directors of Arris and Pace and is expected to close in late 2015. Arris Chairman and CEO, Bob Stanzione will be New Arris Chairman and CEO. The companies said the merger should generate significant synergies from the optimisation of back-office infrastructure, component procurement and go-to-market efficiencies, and the removal of Pace's public company costs.
According to SRG Research, the merger will bring Arris and Pace just behind Cisco in the global video infrastructure market, with a combined 17 percent market share compared to 18 percent for Cisco. Arris and Pace were already numbers one and two in the client hardware market, and their merger will make them three times bigger than the nearest rival, Technicolor. Cisco will still remain well in the lead on network hardware and video software.
Pace released a trading update along with the merger announcement, saying it had a good start to the financial year. Revenue in the year to date was higher than the same period in 2014 and the year-on-year comparison is expected to improve further in H2. An improved sales mix and procurement benefits have also led to higher gross margins.
