There’s not much bad that can be said about the acquisition by Pace Plc, the UK based global pay TV set top leader, of the US based 2Wire home gateway business. 2Wire has already shipped over 30 million home gateways.
2Wire has had AT&T as a captive customer for ten years, and for the past 3 or 4 years has enjoyed Alcatel as a shareholder and partner. It supplies the bulk standard home gateway for BT in the UK, but something like 75% of its revenues come from AT&T, a fairly unstable position to find yourself in. The dominance of AT&T will not be such a problem for Pace.
This is because it is coming up to around $2 billion of annual revenue (the last six months was $992 million), a huge leap since it acquired the Philips set top operation last year. If you add the $667 million annually that 2Wire has in revenues, and the $29 million it had last year in net profits, that puts the combined entity to something like $2.6 billion revenues, with something over $165 million in profits.
Pace is almost certainly capable of slimming down the 2Wire overheads and cutting away a few costs, and on the back of two recent acquisitions (Philips set tops, and French home gateway manufacturer Bewan) it will already have experience in the acquisition process. But we’re fairly sure investors will still not like the over reliance on AT&T for its continued revenues.
What they will like is the possibility that Pace might get more US tier 1 AT&T business for the rest of its product line. Though this is always a long process and is by no means guaranteed.
It looks to us like Pace bought Bewan and saw the writing on the wall, which is the possibility, which it may well have been seen in recent RPQs, that more and more set top capability could end up in IP based home gateways. Having seen that and got to grips with the technology, it decided on what is a major strategic move. Curiously however set top revenues in the US are flat, though home gateway sales are still rising.
The $475 million will be paid in cash although Pace will get $55 million of it back, in terms of 2Wire’s cash at closing. The rest comes out of reserves and new borrowings which have not quite been nailed down at Pace’s banks. The deal is conditional on debt being arranged on the right terms.
Neil Gaydon, Chief Executive Officer of Pace plc, commented, ‘This acquisition will strengthen our Americas business, extending Pace’s US market coverage with entry into the tier one telco market. We have built a strong position in the US with cable and satellite operators and 2Wire, with its expertise in the broadband residential gateway market, will enable us to address a full range of US operator requirements. 2Wire’s software and gateway expertise will further drive development of our home entertainment convergence strategy. The transaction introduces deep client relationships with important customers including AT&T and further develops our platform to deliver ongoing sustainable growth.’
Following the completion of the acquisition, Pace, already the number one global digital set-top box company, would also become the number one provider of telco residential gateway devices in the US and the number three provider globally. 2Wire is currently owned by a consortium of strategic and financial investors including Alcatel-Lucent, AT&T, Telmex, Oak Investment Partners, Meritech Capital Partners, and Technology Crossover Ventures. The transaction will be completed during the fourth quarter of 2010.
Pace only currently holds cash of around £94 million or $147 million so will need to borrow at least $280 million, taking into account the $55 million in the 2Wire bank account.