UK set top maker Pace Microsystems almost doubled its size in one stroke, in a deal to buy Philips out of the set top business, acquiring a $512 million business for a pittance, at $136 million, mostly in an issue of new shares, with a spattering of cash.
Most accounts that reported this story failed to give a feel for the scale of this deal. Go back a year and Pace was struggling with revenues of just $355 million, and Philips’ set top business was doing almost $680 million, but a year is a long time in set tops, and Pace has managed to break through in the US last year, delivering on the promise of being one of the first companies to comply with cable conditional access systems, imposed by rivals. It also broke through in High Definition DVRs.
Today that makes Pace around a $770 million business, and while Philips had fallen away somewhat, together the two businesses are on track for well over $1 billion, and are likely to be profitable if not immediately, then not long after.
The Philips STB and connectivity solutions business employs 335 staff in France and like Pace offers satellite, cable, terrestrial and IPTV set-tops and Pace will issue 68 million new shares to Philips at completion and another 1.9 million shares shortly after, plus €5 million ($7 million) in cash over a 3 year period. Pace has never been a cash rich company, but then again doesn’t hold hardly any debt either. Philips will then own 22.5% of Pace shares.
The strategy of Philips over the past four or five years, to get out of making things and put its energy into intellectual property and designing devices, fits this deal perfectly and Pace may well find that Philips is a good friend to have in terms of patents and future innovation. The deal will be accounted for as a reverse takeover, the company said.
Neil Gaydon, Chief Executive Officer of Pace said, ‘Based on 2006 performance, this deal will create a company with pro forma revenues of over $1 billion, producing approximately 8.5 million set top boxes a year’. There is a strong strategic fit from customer, product, geographic, culture and scale perspectives. We have minimal customer overlap and the combined group will have a significantly enhanced technological position.’ The company said it will be the world’s third largest set top maker after Thomson of France and Motorola.
All of that is genuinely key and Pace will have more scale, Philips will have less risk, and Philips brings more European and central and southern European business, while Pace brings strong German, UK and US business. Philips brings deals at Canal +, Telefonica and BT, while Pace has DirecTV and Comcast in the US, and Sky in the UK and Premiere in Germany. But the Philips business is indubitably shrinking, and Pace will have to lend it some of its more advanced product lines urgently.
Pace’s last market update in October said it was on track and the Board re-asserted its performance was in line with expectations. Pace will be allowed to use the Philips brand name for a period of three years. Disappointingly Pace shares barely registered the news.
This week the Dell’Oro Group, a market researcher in the telecommunications industry, said that the worldwide set-top box market contracted 2% in the third quarter from the second quarter this year, despite strong growth in IPTV and satellite. Basically cable sucked because US cable was focused on converting analog subscribers to digital before the FCC’s deadline on CableCard, and they purchased set-tops ahead of demand. Hopefully for Pace, this was a one quarter blip.