Pace Soars as Arris Agrees to $2.1 Billion Inversion Deal

Arris Group Inc. agreed to buy British set-top box maker Pace Plc for about $2.1 billion and incorporate in the U.K. in a deal designed to save on taxes. Shares in Pace, one of Britain’s few global technology companies, rose as much as 44 percent.

The acquisition will combine two of the biggest equipment makers for telecommunications and cable companies in the U.S. and give Arris access to the satellite market. It will also reduce Arris’s non-GAAP tax rate to as low as 26 percent, the company said in a statement.

The biggest threat to the takeover will be U.S. antitrust concerns, Nick James, an analyst with Numis Securities said on Thursday. Together, the companies provide 70 percent to 80 percent of the U.S. cable industry’s set-top boxes, he said. The deal comes as the cable market is consolidating with Comcast Corp.’s planned merger with Time Warner Cable Inc. and AT&T Inc.’s deal for DirecTV.

“With the structural challenges in that industry, there’s pressure on margins from some very big customers,” James said in an interview. “One of the best ways to mitigate that is to consolidate.”

Arris said it doesn’t expect antitrust issues. The combined business will have 8,500 employees and keep operational headquarters in Suwanee, Georgia.

Pace shares were 31 percent higher at 436.5 pence at 10:05 a.m. in London. This was above the implied price of the cash and share offer in the companies’ statements, estimated at 426.5 pence per share, although it can be explained by the jump in Arris stock after the announcement. Pace investors will get 1.325 pounds of cash and 0.1455 shares in the new company for each of their shares.

Pace had sales of $2.62 billion last year and net income of $198.6 million.
Inversion Trend

The deal is the second so-called tax inversion deal announced by a U.S. company this year, following Cyberonics Inc.’s acquisition of Milan-based Sorin SpA in February. The practice drew political scrutiny last year, and the U.S. Treasury in September took steps to make it less enticing.

“We’re not expecting any issues,” Arris Chief Executive Officer Bob Stanzione said on a conference call. The deal fits within the rules for an inversion, he said, “and we’ll still be a big taxpayer.”

The U.K. technology industry has become attractive to investors because of the weaker pound, Eoin Lambe, an analyst for Liberum said. Other U.K. targets may be semiconductor developer Imagination Technologies Group Plc and telecommunications network testing company Spirent Communications Plc, he said. Neither company responded immediately to a request for comment.

Arris had been looking for a way to enter the satellite market for several years, Stanzione said.

“Satellite was an area we were honing in on,” he said. “That is an area of intense interest right now because of other deals that are happening in the marketplace.”