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22 November 2018

Time for Technicolor to bow out of hardware, become VFX biz

With the recent acquisition of Arris by CommScope illustrative of a grave period ahead for the set top market, it was only a matter of time before Technicolor became the topic of takeover speculation. The French video technology vendor has since issued a statement, refusing to deny reports and saying that any discussions are at a preliminary stage.

Another major set top exit therefore seems imminent, just three years after buying Cisco’s set top business for $600 million in cash and stock. Reports suggest Technicolor is investigating a full or partial sale of the business, including its connected home division which is currently in the midst of a three-year transformation project. To us, it sounds like the rumor mill is saying the transformation has so far been a failure.

Technicolor has been fat trimming in other areas, most recently the sale of its patent licensing business to wireless technology developer InterDigital, which completed back in August. But while we have known about Technicolor veering off course into rocky waters as of late, this week’s rumor reeks of a complete absence of strategy, despite bringing in plans to cut annual fixed cost structure by 40%, representing €140 million in savings over three years. At the time of publication in July, Technicolor promised investors an average pay-back of less than 15 months.

Its latest financial report tells it all. From total revenue of €1.77 billion, down 15.7%, Connected Home declined by 13.6% in the first half of this year to just over €1 billion, with video suffering a 22% hit to €543 million, which Technicolor blames on the shortage of key components – meaning €210 million worth of orders could not be delivered, mostly MLCCs (Multilayer Ceramic Chip Capacitors), a type of package for integrated circuits. These same delays have continued to hinder Technicolor throughout the second half of this year and will continue into early 2019, the company warns, so expect a significantly smaller video sector very soon.

The Entertainment Services segment declined by 3.1% in the six-month period to €756 million, driven down by the DVD business, while the Film and TV VFX (Visual Effects) arm of the Production Services sector increased by 4.6% to €383 million.

So who is a likely contender to end up owning Technicolor? Aside from its set top division, Arris has a hefty presence in networking equipment, making it a good fit for its new owner, network infrastructure provider CommScope, which would not be the case for Technicolor. We believe CommScope will begin unraveling the unprofitable Arris set top business gradually over the next few years.

However, a large enterprise looking at buying into growing markets such as DOCSIS 3.1, Android TV and HDR, as just three examples from Technicolor’s portfolio, could secure some exceptional technologies for a bargain price after shutting down the set top business. After all, Technicolor claims to be the only company in North America so far delivering new DOCSIS 3.1 gateways, with deals at Comcast, Charter, Cox and Rogers, while the company has described Android TV operator tier as a critical area over the coming years, especially in Europe, MENA and Asia Pacific.

After revenue fell 34.3% in North America to €472 million in H1 2018, Technicolor warned that it expected further declines triggered by the 15% shrinkage projected in the overall North American cable market. In Asia Pacific, on the other hand, Technicolor grew revenue by a promising 86.6% to €177 million, overtaking Latin America. At this rate, full year 2018 revenue looks destined to drop below €2 billion, coming in at just over €2.1 billion last year, and shrinking rapidly from the €3.5 billion from five years ago.

Technicolor’s market cap as of writing is €307.3 million ($350.3 million), falling from €422.7 million ($484.3 million) earlier this week, with shares slumping as reports of its set top exit first swirled. It also has a nominal gross debt of €1.1 billion ($1.25 billion), which has been rising not shrinking, although Technicolor’s last financial release promised significant debt prepayments in the second half of 2018, including from the proceeds of the sale of the patent licensing business.

“There have been press reports and market rumors with respect to potential transactions involving Technicolor. The company regularly reviews and evaluates strategic alternatives for its assets, whether acquisitions, combinations or divestments, in the best interest of its stakeholders. This may involve discussions with industry players and/or financial investors. This is an ongoing process in keeping with management’s mission to deliver value for shareholders,” said the statement issued at the start of this week.

The recently imposed US import tariffs, relating to set top components not complete hardware, are likely to have been a contributing factor in whatever exit plans are currently being explored.