Pace stands firm over strategy after losing out in Motorola bid

Allan Leighton
Allan Leighton
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PACE insisted it was right not to overpay for Google’s Motorola Home set-top box business, after it was trumped by US firm Arris’s $2.35bn (£1.45bn) bid.

The Saltaire-based set-top box maker said it was “unable to reach an agreement with Google on terms that the board believes would have been in the interests of Pace’s shareholders”.

The Motorola Home business designs, makes, sells, installs and services set-top boxes for digital and internet protocol video, satellite and terrestrial TV networks.

“I’m not at all disappointed,” said Pace chairman Allan Leighton. “We do not overpay and I would be disappointed if we overpaid for things.

“The reason this business has been transformed is we have very strong financial discipline.

“Disappointment is a very short-term phenomenon. If you overpay it’s a very long-term issue.”

Mr Leighton declined to say what price would have been acceptable.

Pace confirmed its interest in buying the much larger Motorola business earlier this month. That forced the suspension of its shares. Pace’s proposed acquisition would have been classed a reverse takeover due to Motorola Home’s $3.4bn (£2.1bn) revenues exceeding Pace’s $2.3bn turnover.

Pace’s shares resumed trading yesterday, edging up 1.4p to close at 186.7p.

In a statement, Pace chief executive Mike Pulli said: “We have made significant progress in developing our business over the past 12 months by being relentless in pursuing the strategy we announced in November 2011.

“That strategy is to transform our core economics, build on our position as the global leader in PayTV hardware and widen out our business into software, services and integrated solutions.

“We viewed the potential acquisition of Google’s Motorola Home business as an opportunity to accelerate our stated strategy, but only if real shareholder value could be delivered. Although we had the support of our major shareholders and committed facilities, we could not reach an appropriate conclusion to the potential transaction.”

He added Pace is confident on its 2012 financial results and said it “continue(s) to be encouraged about our prospects for the future”.

Technology firms are trying to adjust to the rapidly-changing home entertainment market, which increasingly involves content streamed over broadband and a wide range of connected devices, from smartphones to tablet PCs.

Arris hailed the cash and shares deal as a “transformational combination of two complementary businesses”.

The “profitable” Motorola business spans software, networks, services and systems integrations. It claims to be “pioneering advancements in the cloud, the network and the home” to create next-generation homes connected to the internet.

Arris’s revenues will soar to $4.7bn, with its customer base also expanding. It said the company will now span the full spectrum of broadband content and service providers.

Google acquired the set-top box business as part of its $12.5bn purchase of Motorola Mobility last year.

Under the stewardship of former Asda CEO Mr Leighton, Pace launched a revised strategy in November 2011 which prioritised expanding into software, services and integrated solutions.

Asked if Pace needed the Motorola deal, Mr Leighton replied: “We put a strategy into place and have been executing along that. We just continue to do that.”

He added Pace had “huge support” from investors, following a turbulent spell under former management which saw a series of profits warnings.

“The key thing here is the business a year ago would not have been able even to look at this opportunity,” he said. “The credibility that the management team has and its performance meant two things: all our major shareholders were supportive of us looking at this transaction, and we had committed facilities to do what we needed to do.

“This has been a role model of governance.”

Pace’s facilities are underwritten by Royal Bank of Scotland and HSBC and include Lloyds TSB, Barclays, Santander and Yorkshire Bank.

Mr Leighton said Pace will continue chasing both organic and acquisitive growth. “You never know, things come along as it did with this and we will look at the opportunities,” he said. “The business is now in the shape where it can think like that and act like that.”

Pace recently said disruption to its supply chain – when key hard disk drive suppliers were brought to a standstill over a year ago by flooding in Thailand – had not hurt underlying earnings in its second half.

Despite warnings about the satellite and cable TV market being eclipsed by internet TV market entrants such as the NetFlix film service and Apple TV, Pace recently said: “The PayTV market continues to show resilience despite the uncertain economic conditions and previously feared disruptive threats from new over-the-top (OTT) market entrants.”

Backing from the analysts

Analysts said Pace showed “encouraging discipline” over the deal.

In a note to clients, JP Morgan analysts said: “While we believe Pace will regard this outcome as a disappointment, we are encouraged to see the company maintain its discipline over pricing and not chase an acquisition to a price that may not have been appropriately value-accretive.”

Exane BNP Paribas analysts said: “We believe Pace’s management has been extremely cautious not to overspend on an asset which has some revenue overlaps with Pace’s own activities and would have raised significant integration challenges considering the size of Motorola Home.”