Technicolor buys Cisco’s STB assets in US$600m deal

French set-top box maker Technicolor (EPA:TCH) has bought Cisco’s (NASDAQ:CSCO) customer premises equipment business in a US$600m cash and stock deal.
The US communications technology group’s assets will double Technicolor’s ‘connected home’…

French set-top box maker Technicolor (EPA:TCH) has bought Cisco’s (NASDAQ:CSCO) customer premises equipment business in a US$600m cash and stock deal.

The US communications technology group’s assets will double Technicolor’s ‘connected home’ revenues, giving it about 290 million STBs in total in more than 100 countries.

Their combined divisions have €3bn (US$3.3bn) in pro-forma revenues for 2014, and are expected to help Technicolor’s connected home segment reach more than €200m (US$220m) in adjusted EBITDA by the end of 2016.

The debt free deal comprises about US$450m in cash and US$150m in newly issued Technicolor shares. The share price used for the calculation of the number of new shares issued to Cisco will be the volume-weighted average price between the seven days before and seven after the acquisition announcement. Based on the company’s current share price, the consideration would equate to a holding of just over 5%.

The two companies have also signed a strategic partnership that will see them spend a combined US$250m annually on researching next generation video and broadband technologies. In addition, the pair have signed a long-term patent cross-licensing agreement that covers specific intellectual property and patents from both companies.

Commenting on the transaction, Technicolor CEO Frederic Rose said: “Through this acquisition and strategic agreement, Technicolor can immediately bring its unrivalled experience and innovation in video creation, delivery, and display to more customers in more geographies, while strengthening our position as a technology leader.”

The cash portion of the deal is being financed through cash-on-hand and fully underwritten new debt that Technicolor believes will have a limited impact on its leverage position.

It comes after the group repriced more than US$1bn in term loans in June to support its ‘Drive 2020’ inorganic growth plan. JP Morgan, Goldman Sachs and Morgan Stanley are its lending banks.

Technicolor launched the Drive 2020 strategic plan as part of its full year 2014 results announcement in February 2015. Having spent the previous three years substantially restructuring the business in order to rapidly delever and increase free cash flow generation, Technicolor is now targeting inorganic growth opportunities to position itself as a leader in the media & entertainment services market.

Middleware consolidation continues

Technicolor’s growth through acquisitions strategy reflects the consolidation that has been taking place across the television middleware market. Companies have been seeking to gain scale to better position themselves in the face of new technological trends such as OTT and internet-connected TVs.

Speaking to SatelliteFinance in May, ABI Research analyst Sam Rosen said: “Most set top box vendors are trying to increase their software and service capabilities, including middleware, conditional access and integration services.

“We will see more integration between software, infrastructure hardware and devices.”

This need to defend their market position while keeping up with technological change saw STB makers Arris (NASDAQ: ARRS) and Pace (LSE: PIC) agree to a US$2.1bn merger in April.

The latest deal has seen UK-based IPTV set-top box specialist Amino Technologies (LSE: AMO) agreed to acquire its US peer Entone for US$73m.

Amino said the acquisition would increase both its global footprint and scale as well as consolidate a direct competitor. The transaction is expected to be significantly earnings accretive to Amino in its first full financial year of ownership (FY2016).

Amino will pay an initial consideration of US$65m and a deferred consideration of US$8m over the next two years. Based on Entone’s EBITDA of US$5.1m for the 11 month period to 31 May 2015, the acquisition has a valuation multiple of 14.3 times.

To fund the deal, Amino completed a £21m (US$33m) share placement issuing 16.15 million shares at £1.3 per share.

Canaccord Genuity was Amino’s financial adviser on the acquisition and joint bookrunner alongside finnCap for the share placement.