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Pace plc proposed acquisition of 2Wire, Inc.

26 July 2010

Pace widens US reach into telco market through proposed acquisition of 2Wire, Inc.

Overview

  • 2Wire is a leading provider of advanced residential gateways and associated software and services for the broadband service provider market
  • 2Wire is the number one supplier into the fast growing US telco residential gateway market
  • Proposed acquisition widens out Pace’s US customer base and opportunity beyond cable and satellite to include the telco market
  • A logical extension of Pace’s successful strategy, adding another growth market to the Group’s well-established Americas business
  • Adds further software and gateway expertise that will strengthen the development of Pace’s home entertainment convergence strategy
  • Strong financial rationale: profitable and cash generative business.  Benefit of increased scale and operational synergies

Summary

Pace plc (“Pace” or the “Company”) today announces the proposed acquisition of 2Wire, Inc. (“2Wire”), a leading provider of advanced residential gateways and associated software and services for the broadband service provider market, for cash consideration of $475 million (£308 million) (the “Acquisition”).  The acquisition price is inclusive of 2Wire’s balance sheet cash at closing, anticipated to be approximately $55 million (£36 million).

2Wire has established customer relationships in the tier one telco market, in particular with service providers in North America.  AT&T has been a customer of 2Wire for 10 years and 2Wire provides software and hardware solutions to enable AT&T’s U-verseSM suite of services that includes multiroom high definition TV, high-speed broadband and telephony.  2Wire is currently owned by a consortium including Alcatel-Lucent, AT&T, Telmex, and Oak Investment Partners.

The Company intends to finance the Acquisition from existing cash resources, together with new bank facilities.  The new bank facilities are currently under negotiation and the Acquisition is conditional, inter alia, upon final agreement being reached on the terms of these facilities.

The Pace Board believes the Acquisition is a logical extension of its successful strategy and will enhance its established position in cable and satellite markets in the US with entry into the tier one telco market.  At the same time, 2Wire’s software and gateway expertise will support Pace’s development of its home entertainment convergence strategy.

Following the completion of the Acquisition, Pace, already the number one global digital set-top box company, would also become the number one provider of telco residential gateway devices in the US and the number three globally.

The Acquisition is expected to be earnings and cashflow enhancing for the Company in the first full financial year of ownership1.

Neil Gaydon, Chief Executive Officer of Pace, commented:

“This acquisition will strengthen our Americas business, extending Pace’s US market coverage with entry into the tier one telco market.  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.  2Wire’s software and gateway expertise will further drive development of our home entertainment convergence strategy.  The transaction introduces deep client relationships with important customers including AT&T and further develops our platform to deliver ongoing sustainable growth.”

Pasquale Romano, Chief Executive Officer of 2Wire, added:

“Pace is an excellent strategic fit for the 2Wire business and will enable us to take our products and services to the next level of their development.  The combined customer base, engineering capability and product breadth of Pace and 2Wire make this a compelling transaction for our customers, our employees and our end users globally.”

Tim Harden, President – Supply Chain and Fleet Operations, AT&T commented:

 “AT&T looks forward to continuing our working relationship with 2Wire under Pace’s ownership.”

A presentation for analysts and investors will be held at 9.30 a.m. (London time) today at the offices of RBS, 250 Bishopsgate, London EC2M 4AA.

The Acquisition is conditional on (amongst other things) 2Wire shareholder approval, certain regulatory consents and finalisation of Pace’s bank financing arrangements.  In view of its size relative to the Company, the Acquisition is also conditional upon Pace shareholder approval.

A circular including details of the Acquisition and the bank financing arrangements and containing notice of a General Meeting of the Company (at which a resolution seeking the requisite Pace shareholder approval will be proposed), is expected to be despatched to shareholders within 7 – 8 weeks (the “Circular”).

The transaction is expected to close in the fourth quarter of the current financial year following the satisfaction or waiver of all conditions.

Evercore Partners is acting as Sponsor and sole financial adviser to Pace.  RBS Hoare Govett and JPMorgan Cazenove are acting as corporate brokers to Pace.

Enquiries:

Pace plc
Neil Gaydon – Chief Executive Officer
Stuart Hall – Chief Financial Officer
Helen Kettleborough – Director of Communications
Tel: +44 (0) 1274 532000

Evercore Partners (Sponsor and financial adviser to Pace)
Naveen Nataraj
Lee Hayes
Tel: +44 (0) 207 268 2737

RBS Hoare Govett (corporate broker to Pace)
Alexander Garton
Tel: +44 (0) 207 678 8000

JPMorgan Cazenove (corporate broker to Pace)
David Harvey-Evers
Tel: +44 (0) 207 588 2828

Media Enquiries:

Brunswick (PR adviser to Pace)
UK:  Jonathan Glass
Sarah West
Aideen Lee
Tel: +44 (0) 207 404 5959

US: Carol Roos
Tel: +1 415 671 7676 

 
26 July 2010
 
Pace plc
Proposed acquisition of 2Wire

Pace widens US reach into telco market through proposed acquisition of 2Wire

Introduction

Pace today announces the proposed acquisition of 2Wire, a leading provider of advanced residential gateways and associated software and services for the broadband service provider market, for cash consideration of $475 million (£308 million).  The acquisition price is inclusive of 2Wire’s balance sheet cash at closing, anticipated to be approximately $55 million (£36 million).

2Wire has established customer relationships in the tier one telco market, in particular with service providers in North America.  AT&T has been a customer of 2Wire for 10 years and 2Wire provides software and hardware solutions to enable AT&T’s U-verseSM suite of services that includes multiroom high definition TV, high-speed broadband and telephony.  2Wire is currently owned by a consortium including Alcatel-Lucent, AT&T, Telmex, and Oak Investment Partners.

The Company intends to finance the Acquisition from existing cash resources, together with new bank facilities.  The new bank facilities are currently under negotiation and the Acquisition is conditional, inter alia, upon final agreement being reached on the terms of these facilities.

The Pace Board believes the Acquisition is a logical extension of its successful strategy and will enhance its established position in cable and satellite markets in the US with entry into the tier one telco market.  At the same time, 2Wire’s software and gateway expertise will support Pace’s development of its home entertainment convergence strategy.

Information on 2Wire

2Wire is a US based provider of broadband solutions whose products and services include residential gateways, multi-service media platforms, remote management systems, value-added services and customer support.

2Wire is headquartered in San Jose, California, was founded in 1998 and launched its first residential gateway product in 2000.  2Wire has additional US offices in Nevada City, California; Phoenix and Tempe, Arizona; Austin and San Antonio, Texas; and Atlanta, Georgia.  Across the globe, 2Wire is represented in India, China, France, Germany, Hong Kong, Latin America, Malaysia, Singapore, and the United Kingdom.  The company employs approximately 1,600 employees globally, including 550 in R&D, sales and administration, 450 in customer care and 600 agency employees.

2Wire’s customers include some of the leading service providers throughout the US, Canada, Latin America, Europe, Australia, and Asia, including AT&T, Telmex, BT, CenturyLink, Bell Canada, SingTel, and others. 

As of 30 June 2010, 2Wire has shipped over 31 million managed gateways and is the number one provider of DSL gateway devices in the Americas and the number one supplier worldwide of next-generation VDSL gateway devices.

2Wire’s end-to-end solutions are engineered for the service provider and optimised for the subscriber.  While 2Wire’s residential gateways are at the core of its product offering, its device software and management software are vital components required to manage the increasing complexity of the digital home.  Customer care, logistics and professional services are critical elements of its offering to customers.

2Wire’s primary product and service offerings are Device Hardware, Software and Applications Platforms, and Services.  The main components of these offerings are outlined below:

Device Hardware  

  • A comprehensive range of gateway devices, from standard ADSL value orientated solutions to highly advanced, outdoor, VDSL2 bonded implementations.

Software and Applications Platforms

  • Device Firmware Application Software, Device Management Systems, Service Management Systems, Software Development Kits (SDKs), Service Analytics Tools and Customer Care Tools.

Services

  • An extensive suite of services including customer care, professional services, hosting services and return merchandise authorisation services.

2Wire operates call centres based in San Antonio, Texas and Tempe, Arizona.  The centres offer technical support on installation, troubleshooting and product returns to subscribers, providing 2Wire and its customers with an important link to the subscriber base.

Rationale for the Acquisition

The Pace Board believes the Acquisition represents a logical extension of Pace’s group strategy and will enhance Pace’s successful US business in cable and satellite markets with an entry into the tier one telco market. 

The Acquisition represents a significant opportunity for Pace to enter the rapidly growing US telco residential gateway market and enhance its US market position.  The addition of 2Wire’s software and gateway expertise will strengthen the development of Pace’s home entertainment convergence strategy.

Following the completion of the Acquisition, Pace, already the number one global digital set-top box company, would also become the number one provider of telco residential gateway devices in the US and the number three globally.  The global market for DSL and Fibre based gateways is expected to grow from $3.0 billion in 2009 to $6.7 billion by 2014, a compound annual growth rate of approximately 17%.

Pace believes that in the world’s most developed markets its customers’ TV-led home entertainment and broadband services are moving towards integrated, converged offerings, making gateway devices and the related software, applications and services increasingly important.  In this context, know-how and experience with both service providers and end-users is a vital and key competitive differentiator, with the world’s largest telcos and other service providers recognising value in the ability of their suppliers to provide a converged services offering. The acquisition of 2Wire would provide Pace with a strong foothold in the US telco gateway market, which is leading the world in the next generation of digital home entertainment services.

End-to-end ownership of the subscriber experience, including device management, services management, professional services and subscriber care allows 2Wire to deliver an integrated offering, for which there is growing demand from customers. 

Finally, Pace and 2Wire benefit from a complementary set of customer relationships.  2Wire’s customers are primarily Americas based telcos, while Pace enjoys strong relationships with cable and satellite providers in the US and globally. 

Financial Information on 2Wire

For the 12 months ended 31 December 2009, 2Wire reported sales of $667.4 million (£426.2 million), gross profits of $141.8 million (£90.5 million) and profit before tax of $28.9 million (£18.4 million).  As at 31 December 2009, 2Wire had gross assets of $828.6m (£510.6 million).  This financial information has been extracted directly from the audited annual results of 2Wire prepared in accordance with US GAAP. 

A full three-year financial track record for 2Wire, prepared in accordance with International Financial Reporting Standards (“IFRS”) and using the accounting policies adopted by Pace will be set out in the Circular.  The Pace Board notes that, due to differences in accounting treatment between US GAAP and IFRS, the financial information on 2Wire presented in the Circular could differ materially to the financial information set out above.

Principal terms and funding of the Acquisition
Principal terms of the Acquisition

Under the terms of the Acquisition Agreement (as defined in the appendix to this announcement), Pace has agreed to purchase 2Wire for an aggregate cash consideration of $475 million from a consortium of investors including Alcatel-Lucent, AT&T, Telmex, and Oak Investment Partners.  The acquisition price is inclusive of 2Wire’s balance sheet cash at closing, anticipated to be approximately $55 million (£36 million).

The Acquisition is conditional on (amongst other things) 2Wire shareholder approval, regulatory consents, finalisation of bank financing arrangements, and Pace shareholder approval at a General Meeting, notice of which will be sent to Pace shareholders together with the Circular.  2Wire's three largest shareholders (who collectively own more than 50% of 2Wire's outstanding capital stock on a fully diluted basis) have approved in writing 2Wire’s entering into the Acquisition Agreement.  The terms of the Acquisition have been unanimously approved by the boards of directors of both Pace and 2Wire.

2Wire has agreed to pay a break fee to Pace of $8.0 million (£5.2 million) under the Acquisition Agreement if 2Wire’s shareholders do not approve the Acquisition.  Pace is required to pay a break fee to 2Wire of $8.0 million (£5.2 million) under the Acquisition Agreement if Pace’s shareholders do not approve the transaction, the FSA does not approve the Circular or Pace does not obtain the required bank financing for the Acquisition.

A summary of the principal terms of the Acquisition Agreement is contained in the appendix to this announcement.

Funding of the Acquisition

The Company intends to finance the Acquisition from existing cash resources, together with new bank facilities.  The new bank facilities are currently under negotiation and the Acquisition is conditional, inter alia, upon finalisation of the bank financing arrangements.

Pace has received strong indications of interest from a group of banks in relation to the new bank facilities and is in the process of finalising financing terms and documentation with this group.  The Directors are confident of obtaining the necessary debt financing for the Acquisition prior to the issue of the Circular.

It is anticipated that the enlarged group pro forma net debt will be approximately £200 million immediately following the Acquisition.

Financial effects of the Acquisition

2Wire is a profitable and cash generative business with a strong growth trajectory.  Following the Acquisition, reduction of the enlarged group’s net debt from combined business cashflows will be a priority.

The combination of the 2Wire and Pace businesses is expected to deliver meaningful synergy benefits of scale and a broader platform.  Estimated run-rate pre-tax cost synergies of $30 million (£19 million) in the first full year of ownership are expected to arise from the combination of the Pace and 2Wire cost base and the purchasing benefits associated with a larger organisation.  It is anticipated that the cost to achieve these synergies will be approximately $10 million (£6 million), which will be incurred in the first six months of ownership.

Furthermore, revenue synergies are anticipated to be realised from the combined product offerings and customer base.

The Acquisition is expected to be earnings and cashflow enhancing for the Company in the first full financial year of ownership2.

Group Strategy

Pace is a leading technology developer for the global payTV market and was recently recognised as the world’s largest developer of digital set-top box technology. 

The Company’s primary strategic objectives are to be the world’s best set-top box company and to build a leadership position in the technologies, services and products that deliver digital TV and converged home entertainment.  Pace supplies world leading operators with innovative products and technologies that deliver TV-led entertainment services. 

The Company aims to achieve its objectives through organic development, complemented by disciplined acquisitions that deliver a strong geographic and customer fit, broaden the scale and technology capability of the business and are financially sound propositions.

Pace has a strong track record of delivery against its financial and strategic goals.  In addition, the Company has demonstrated its ability to successfully grow its business through strategically important transactions and to tightly manage the integration process following acquisitions.  Having been transformed financially in 2007, Pace’s subsequent acquisition of the Philips set-top box business in 2008 enhanced the shape and scale of the business.  The more recent acquisition of Bewan in April 2010 extended Pace’s technology capability into gateways, and the proposed Acquisition of 2Wire represents an attractive further step in Pace’s overall strategy and development.

Interim results and current trading

The Company announced its interim results for the six month period to 30 June 2010 in a separate announcement released today.

General Meeting

In view of its size relative to the Company, the Acquisition is conditional upon Pace shareholder approval.

A Circular including details of the Acquisition and the new bank facilities and containing notice of a General Meeting of the Company, at which a resolution seeking the above approval will be proposed, is expected to be despatched to shareholders within 7 – 8 weeks.

The Pace Directors and the Pace Employee Benefits Trust have irrevocably undertaken to vote, or procure the vote, in favour of the resolution approving the Acquisition at the General Meeting in respect of their beneficial holdings of Pace shares of, in aggregate, 9,926,212 Pace shares, representing approximately 3.3% of the total issued share capital of Pace.

Financial Advice

The Directors of Pace have received financial advice from Evercore Partners in relation to the Acquisition.

Evercore Partners is acting as Sponsor and sole financial adviser to Pace.  RBS Hoare Govett and JPMorgan Cazenove are acting as corporate brokers to Pace.

Enquiries:

Pace plc
Neil Gaydon – Chief Executive Officer
Stuart Hall – Chief Financial Officer
Helen Kettleborough – Director of Communications
Tel: +44 (0) 1274 532000

Evercore Partners (Sponsor and financial adviser to Pace)
Naveen Nataraj
Lee Hayes
Tel: +44 (0) 207 268 2737

RBS Hoare Govett (corporate broker to Pace)
Alexander Garton
Tel: +44 (0) 207 678 8000

JPMorgan Cazenove (corporate broker to Pace)
David Harvey-Evers
Tel: +44 (0) 207 588 2828

Media Enquiries:
Brunswick (PR adviser to Pace)
UK:  Jonathan Glass
Sarah West
Aideen Lee
Tel: +44 (0) 207 404 5959
US: Carol Roos
Tel: +1 415 671 7676

Evercore Partners is the marketing name for Evercore Partners Limited, which is regulated in the United Kingdom by the Financial Services Authority, is acting exclusively for the Company and no one else in connection with the Acquisition, and will not be responsible to anyone other than the Company for providing the protections afforded to its clients or for providing advice in relation to the Acquisition or any other matters referred to in this announcement.

RBS Hoare Govett, which is regulated in the United Kingdom by the Financial Services Authority, is acting exclusively for the Company and no one else in connection with the Acquisition, and will not be responsible to anyone other than the Company for providing the protections afforded to its clients or for providing advice in relation to the Acquisition or any other matters referred to in this announcement.

J.P. Morgan plc, which conducts its UK investment banking business as J.P. Morgan Cazenove and which is authorised and regulated by the UK Financial Services Authority, is acting exclusively for the Company and no one else in connection with the Acquisition and will not be responsible to anyone other than the Company for providing the protections afforded to clients of J.P. Morgan plc or for providing advice in connection with the Acquisition or any matter referred to herein. 

Certain statements in this announcement are forward-looking statements.  By their nature, forward-looking statements involve a number of risks, uncertainties or assumptions that could cause actual results or events to differ materially from those expressed or implied by the forward-looking statements.  These risks, uncertainties or assumptions could adversely affect the outcome and financial effects of the plans and events described herein.  Forward-looking statements contained in this announcement regarding past trends or activities should not be taken as a representation that such trends or activities will continue in the future.  You should not place undue reliance on forward-looking statements, which speak only as of the date of this announcement.  Except as required by law, the Company is under no obligation to update or keep current the forward-looking statements contained in this announcement or to correct any inaccuracies which may become apparent in such forward-looking statements.

No statement in this announcement is intended to be a profit forecast and no statement in this announcement should be interpreted to mean that earnings per Pace ordinary share for the current or future financial years would necessarily match or exceed the historical published earnings per Pace ordinary share.  Prices and values of, and income from, shares may go down as well as up and an investor may not get back the amount invested.  It should be noted that past performance is no guide to future performance.  Persons needing advice should consult an independent financial adviser.  Any statement to the effect that the Acquisition is expected to be earnings enhancing for the Company should not be interpreted to mean that earnings per Pace ordinary share in the first full year following the Acquisition, nor in any subsequent period, will necessarily match or be greater than those for any preceding financial year.

With the exception of historical financial information on 2Wire, which has been converted at the appropriate prevailing foreign exchange rates, where US Dollar amounts in this document are followed by a pounds Sterling comparison such amounts have been converted, for informational purposes only, into pounds Sterling using an exchange rate of 1.540, being the mid-market rate quoted by Bloomberg as at 4.00 p.m. on 23 July 2010.

The information contained in this announcement is regulated information which is required to be disclosed under the FSA’s Listing Rules.
 
 
APPENDIX

Summary of the Acquisition Agreement

A brief summary of the key provisions of the Acquisition Agreement is set out below. A more detailed summary will be set out in the Circular to be sent to Pace shareholders in connection with the Acquisition in due course.

Pace has entered into an Agreement and Plan of Merger and Reorganization dated 25 July 2010, to acquire 2Wire, Inc. (the "Acquisition Agreement").

The parties to the Acquisition Agreement are Pace, a newly formed indirect wholly owned US subsidiary of Pace, 2Wire and Shareholder Representative Services, LLC (as 2Wire’s stockholders' representative).  The purpose of the Pace subsidiary is to permit the Acquisition to occur by a common US structure called a “reverse triangular merger”, where the subsidiary will merge with and into 2Wire with 2Wire being the surviving company and becoming an indirect wholly owned subsidiary of Pace.

The total consideration payable by Pace to 2Wire stockholders, option holders and participants in 2Wire’s Management Incentive Plan will be $475 million in cash.

The Acquisition Agreement contains customary representations, warranties and covenants from both Pace and 2Wire.  In addition, Pace and 2Wire have agreed to make all necessary notifications, applications and filings in relation to regulatory consents and approvals required for the Acquisition as promptly as reasonably practicable after the execution of the Acquisition Agreement.

Completion of the Acquisition is conditional upon, among other things: approval by Pace shareholders at a General Meeting; approval by 2Wire stockholders; expiration of any waiting period under the Hart-Scott-Rodino Antitrust Improvements Act; receipt of notice from the Committee on Foreign Investment in the United States or the President of the United States confirming that the Acquisition does not present any unresolved national security concerns; no material adverse effect on 2Wire having occurred; and Pace entering into definitive debt financing documentation, the conditions precedent to any such financing having been satisfied in full and the debt financing having not been cancelled by any party thereto. 

The Acquisition Agreement also contains certain termination provisions including the following:

  • either party may terminate if (A) the Acquisition is not closed by 31 January 2011, as such date may be extended by either 2Wire or Pace until 30 April 2011 if regulatory approvals are the only remaining conditions (the “Termination Date”); (B) approval of the other party's shareholders is not obtained; or (C) the other party breaches its representations, warranties or covenants rising to a material adverse effect on the relevant company and such breach is not cured within 30 days;
  • Pace may terminate if (A) 2Wire withdraws or modifies adversely its board recommendation or (B) 2Wire fails to obtain the approval of the 2Wire stockholders;
  • 2Wire may terminate if (A) it has failed to obtain 2Wire stockholder approval; (B) Pace fails to obtain the approval of the Pace shareholders at the General Meeting by the Termination Date or (C) Pace fails to obtain bank financing sufficient to consummate the transaction.

In addition, 2Wire has agreed to pay Pace a termination fee of $8.0 million (£5.2 million) if the Acquisition does not close due to the failure of 2Wire to obtain stockholder approval and Pace has agreed to pay 2Wire a termination fee of $8.0 million (£5.2 million) if the Acquisition does not close due to the failure of Pace to obtain FSA approval of the Circular, shareholder approval by the Termination Date or the necessary bank financing, in each case subject to certain exceptions.

1 -   Earnings enhancing before the amortisation of additional intangible assets recognised as part of the business combination under IFRS3.  This statement does not constitute a profit forecast and should not be interpreted to mean that earnings in the first full year following the Acquisition, nor in any subsequent period, will necessarily match or be greater than those for any preceding financial year.

2 -   Earnings enhancing before the amortisation of additional intangible assets recognised as part of the business combination under IFRS3.  This statement does not constitute a profit forecast and should not be interpreted to mean that earnings in the first full year following the Acquisition, nor in any subsequent period, will necessarily match or be greater than those for any preceding financial year.

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