By Dominique Vidalon
PARIS (Reuters) – French media & entertainment technology group Technicolor will buy Cisco System's home video equipment business for 550 million euros ($602 million), it said on Thursday, sending its shares to a five-year high.
The cash-and-stock deal is part of Technicolor's efforts to expand in the thriving home video market & boost profitability.
p> It will create the world No. 2 in customer premises equipment (CPE) – phone gear, cable & satellite TV set-top boxes, routers & switches – with total sales of 3 billion euros ($3.3 billion) & a 15 percent market share.
That compares with 25 percent that will be held by U.S. network gear maker Arris Group & British set-box maker Pace when they complete a merger.
"Video is what is driving traffic today," Technicolor CEO Frederic Rose told a conference call. "All this is fueling a massive demand for customer premises television equipment."
By 1014 GMT Technicolor shares were up 19 percent, trading near 7.5 euros, their highest level in five years.
"This deal makes sense as Technicolor needed to increase its size especially after the ongoing Pace/Arris deal," said one Paris-based trader. He said Technicolor was buying Cisco's business for four times its earnings before interest, taxes, depreciation & amortization (EBITDA).
Rose acknowledged that talks between Technicolor & Cisco accelerated after the Arris-Pace deal was announced in April.
The transaction will moreover boost Technicolor's footprint in North America, the biggest CPE market in the world. The combined company will make 57 percent of its sales in North America.
It will double annual revenue at its Connected Home division, donate it 290 million set-top boxes installed in over 100 countries, & generate annual savings of over 100 million euros from 2018, the company said.
Rose said he did not expect any large-scale restructuring as the two companies had complementary products.
The transaction is expected to close by the end of the fourth quarter of 2015 or in the first quarter of 2016.
After completion, Technicolor said its Connected Home division should reach adjusted EBITDA in excess of 200 million euros by the end of 2016, & an adjusted EBITDA margin of 8-9 percent by 2017.
The deal will moreover boost earnings per share by a double-digit percentage at a group level as of 2016, Technicolor said.
Under the terms of the deal, Cisco will receive approximately 413 million euros in cash & approximately 137 million euros in newly issued Technicolor shares, subject to certain adjustments provided for in the agreement.
The 413 million euro cash portion will be financed through cash on hand & fully underwritten new debt.
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(Reporting by Dominique Vidalon; Editing by Pravin Char & Susan Thomas)