Booming Pace set for £308m takeover in the US

The Saltaire-based company, which earlier this year claimed top spot in the global set top box market, said the purchase of 2Wire would lift it to third in the global "home hub" or "residential gateway" market.

The purchase will extend its reach from cable and satellite into the telecoms market. Shares in Pace surged 14 per cent on the deal and strong results, closing the day at 214p, an increase of 26.5p.

"It's really a natural step," said chief executive Neil Gaydon. "It fits exactly the Pace strategy – it has been to put Pace at the heart of convergence for the digital home.

"It widens the Pace capability, where we have been very successful with cable and satellite."

Residential gateways are home networking devices which allow consumers to connect technology such as high definition TV, digital video recorders, video on demand, digital photography, home CCTV and gaming consoles, to create a "convergent experience".

This allows users universal access to all their multimedia content, whether at home or away, over a broadband connection.

The purchase of 2Wire will allow Pace to take a giant stride further into the US market, which is the leading marketplace for next-generation digital home entertainment services.

"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," said Mr Gaydon.

The residential gateway market is currently worth about $3bn globally, and is forecast to grow to $7bn within three to four years.

"We see this market of combined media gateway, video, broadband, voice-over IP and full managed services throughout the home as a three/four-year play," said Mr Gaydon.

2Wire also has call centres which deal direct with the consumer, and Mr Gaydon said this would give Pace a very good understanding of the needs of customers. 2Wire also has a 10-year relationship with US telecoms giant AT&T.

Pace will use existing cash and an as-yet unfinalised bank facility to fund the purchase. Net debt is expected to be about 200m after the acquisition.

"It makes financial sense," said Mr Gaydon. "They are already profitable and generate cash and we've not diluted the company."

2Wire reported sales of 426.2m in the year to the end of December, with pre-tax profits of 18.4m. Its balance sheet is expected to include cash of 36m.

Shareholders of both companies will need to approve the deal, which is expected to be earnings and cashflow enhancing in the first full year of ownership. It expects to deliver 19m annual cost savings from synergies between the firms.

Pace yesterday reported pre-tax profits of 45.4m in the six months to the end of June, on revenue 21 per cent higher at 635.2m. It said it was close to achieving its eight per cent operating margin target.

It shipped 9.6 million set top boxes during the six months, up on 8.5 million a year earlier.

Mr Gaydon said the results would have been slightly better were it not for supply shortages.

"It's very tight," he said. "The lead times are pushing out, if anything. We are working closely with our customers and the supply chain to manage a situation which is not getting better and doesn't look like it will get any better for the next 18 months."

He added demand for high-definition TV was boosted by the soccer World Cup, which finished earlier this month.

"Rather than the World Cup being a bubble, it's actually been a platform for further growth," he said. "The market's growing, and we're continuing to grow."

Pace said given its strong position and ongoing demand for digital television, it should deliver mid-single digit revenue growth over the medium term. Its next step will be to expand in Eastern Europe, Russia and Asia.

ANALYSTS FIND MOVE BENEFICIAL

Analysts at JP Morgan Cazenove said they saw the deal adding 12 per cent to forecast earnings in 2011 and 18 per cent in 2012. The company's first-half results alone, which beat Cazenove's forecasts, justified a re-rating of the shares, they added.

"The acquisition of 2wire is important for two reasons in our view: First, it allows Pace to enter a new market and supply US telcos, and second, it adds further software and gateway expertise to further strengthen the company's leading position in converged devices," they said.

WH Ireland analyst Eric Burns said: "It significantly broadens Pace's offering in the US market and opens up the fast-growing telco residential gateway market giving Pace full access across satellite, cable and broadband."