Set-top box maker Pace (LSE: PIC) is surging today after ARRIS Group offered to buy the company for $2.1bn. Pace’s shares have jumped by more than a third to 440p at time of writing, valuing the company at just under $2.1bn.
According to the terms of the deal, Pace shareholders will receive 133p in cash and 0.1455 new Arris shares for each share held — equal to around 427p per share based on yesterday’s prices.
The deal will see Arris and Pace merge to create a new company that will be incorporated in the UK, a move that’s designed to lower the enlarged group’s tax bill.
Indeed, after the deal the enlarged Arris’s corporate tax rate will fall to around 27%, from 37% as reported during 2014.
In many ways, this deal is good news for the shareholders of both Arris and Pace. The deal comes at a time when the demand for set-top boxes is really starting to take off, as consumers switch to what have been branded “over-the-top” services. These services allow users to stream video through a high-speed broadband connection.
Arris produces telecommunications equipment that enables companies to transmit high-speed data, video and telephony systems. So it makes perfect sense for the company to combine with Pace, a producer of set-top boxes.
What’s more, Arris’ largest customers include Comcast, Time Warner Cable and AT&T. These are some of the largest telecoms groups in the world.
And when the deal is completed, the combined Pace-Arris group will be a force to be reckoned with. Figures show that the enlarged group will have 8,500 employees globally, and is on track to report $8bn per annum in sales.
Further, according to Arris’s figures, the deal will boost Arris’s earnings per share by as much as 25% in the first 12 months after close. Pace shareholders will own 24% of the enlarged company when the deal is completed.
Stay or go?
So, should Pace shareholders accept Arris’s offer of shares and cash, or should they cut and run?
Well, the enlarged Arris will be one of the world’s largest providers of equipment for “over-the-top” services, a market that’s growing rapidly and showing no signs of slowing down. Wall Street analysts expect Arris’ earnings per share to expand by around 40% this year before taking into account any synergies from the deal with Pace.
And with that in mind, it makes sense for investors to hold on to their Arris shares offered as part of the deal: Arris’ earnings are set to explode over the next few years.