A big takeover after weak earnings will not please shareholders
November 8, 2018
CommScope hopes customers will become more free-handed as data usage explodes in response to the rollout of 5G
When underlying sales and profits are poor, a chief executive likes to have an alternative talking point. A massive, debt-fuelled takeover, as it turns out, does not do the trick.
On Thursday, CommScope announced another poor quarter with operating earnings down 1 per cent. The US telecom equipment maker also lowered its profit forecast for the remainder of the year. Shareholders were still reeling from that gut punch when the company told them it would acquire rival Arris— whose biggest unit, cable TV set top boxes is in decline — for $7.4bn in cash.
CommScope dropped all the buzzwords on Thursday: “5G”, “internet of things”, “end to end solutions”, and so on. The other thing that dropped were the shares, which crashed by a quarter in one morning. No wonder.
CommScope’s chief customers are large wireless operators such as AT&T and Verizon. These businesses are themselves out of favour among investors as the wireless market has matured. A few leviathans are rationing their spending with suppliers such as CommScope.
The group hopes customers will become more free-handed as data usage explodes in response to the rollout of 5G. As wireless, cable TV and broadband are increasingly provided by the same companies, adding Arris should help build a one-stop shop for telecom equipment.
The deal is hefty, in effect doubling the enterprise value of CommScope. Its debt to ebitda ratio is forecast to shoot up to nearly six times, a level associated with private equity buyouts. Appropriately, CommScope’s former owner Carlyle Group is investing $1bn to support the deal. In exchange it will get a 5.5 per cent dividend and 16 per cent of the company.
Timing strategic deals is tricky, as CommScope is finding out. Making such tough calls is what chief executives are paid for. The danger with this deal is that it has amplified rather than turned down risks borne by investors.