Blackfriar: Change gathering Pace as it struggles to stay relevant

This week two more senior executives headed for the exit at Saltaire, as the new chief executive streamlines and simplifies management.

Mark Loughran, president of the group’s international arm, was replaced by Shane McCarthy, and Pulli axed the role of chief strategy officer, resulting in the departure of Scott Sheldon.

In total, six senior executives have gone since former Asda boss Allan Leighton was drafted in as chairman to bring about swift change.

Chief executive Neil Gaydon and finance director Stuart Hall have been the highest-profile casualties.

After three profits warnings caused by a range of problems including severe flooding in Thailand, the Japanese tsunami and a delayed order from a large United States customer, there was clearly no room for sentiment.

Last night, shares in Pace closed at 71p. They have been lower, bottoming out at 43.5p late last year.

But even so, this values the world’s biggest maker of set-top boxes, a £1.47bn turnover company, at a mere £225m by market capitalisation. Its shares were changing hands for 227p in February 2011.

So Pulli’s haste is not misplaced.

Pace is in bargain territory, and Ian Robertson of Seymour Pierce stockbrokers believes it looks increasingly vulnerable to a takeover.

IT giant Cisco last month announced plans to buy video software firm NDS Group for $5bn, and Robertson believes Pace could help its expansion.

“Pace could possibly be a useful acquisition to help make the NDS deal’s strategic goals achievable,” he said, adding Pace’s share price is “simply too low”.

Private equity, Samsung and Humax are other possible buyers whose names have been bandied about.

Investors, who’ve been burnt repeatedly by Pace’s nose-diving share price, may have reached breaking point and could favour a sale. But whether they would accept an offer anywhere near the current level is another matter.

Jonathan Imlah of stockbrokers Collins Stewart says it’s inconceivable these kind of names have not been sniffing around Pace.

He believes Pace is very vulnerable to “long-term structural headwinds” – hence a bid has failed to materialise.

OTT – where content is streamed direct to TVs and media players through the internet – is increasingly negating the need for a set-top box.

Companies like Netflix are taking advantage of superfast broadband to sell content direct to viewers’ iPads and internet TVs.

Imlah believes set-top boxes are “an anachronism no-one really wants”, and will only be relevant for as long as the pay-TV companies need them to ensure a sticky relationship with their customers.

“It’s still vital for Sky and Comcast to manage that relationship,” he said. “(But) if you had the choice of everything going to the TV, why would you choose that?

“What acquirers will be troubled by is that Pace is a legacy business, trying to move to a service business.

They can stabilise the ship, but actually setting it in a new direction and making profit out of that will be a lot harder.”

Pace has made steps to capture new markets, buying gateway maker 2Wire in 2010 for $475m (£301m). 2Wire is the third-biggest global player in developing boxes to link multiple devices in the modern home to the internet.

And it argues the “in-home device” will still be a big part of the modern living room in future.

But the title of Pace’s strategic review in November made clear the challenges ahead.

“Making the future work” was a clear admission that doing nothing is not an option – Pace needs to modernise and time is not on its side.

Mobile phone firm Nokia, once the industry leader, had its “burning platform” moment last year as it admitted the need to modernise and compete in the smartphone market if it is to survive.

While Pace’s strategic review was not quite as drastic, Blackfriar sees similarities between Nokia CEO Stephen Elop’s frank call to arms. The cornerstones of Leighton’s review are big cost savings, making the most of its leading hardware position, and widening out into software and services, where it currently only makes a small fraction of its revenues.

Content security will be a bigger part going forward. Pace also wants to become known as a one-stop-shop for integrated software and hardware.

Profits from software and services will make up 50 per cent of the group total in five years, it hopes.

Pace, a proud Yorkshire company founded in 1982, has been at the forefront of TV technology for about three decades.

It has forged admirable relationships with some of the world’s biggest media and content firms, and is a mine of innovation and skills.

But the world is changing rapidly and Leighton and Pulli have a big task ahead if Pace is to remain independent for another 30 years.

Otherwise Blackfriar fears its set-top boxes may go the same way as the VCR – gathering dust on top of a wardrobe.