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Private-equity firms should be able to tap the debt markets to help finance the purchase of Motorola’s (NYSE: MOT) home-and-networking gear business, a source close to the situation and one industry lender told dealReporter.
Levering these assets 4x to 5x EBITDA should be possible, with the source close to the situation noting that debt markets have opened up for larger deals with better credit quality names. This is the reason why there is demand for this business at this time, he added. However, one credit strategist thought levering 3x to 4x could be more realistic for these type of deals. EBIT for the unit is expected to come in at USD 665m for 2009, according to a recent Citi report.
A PE firm should be able to put up enough equity to push the valuation from 7x to 10x, with the equity contribution likely approaching 50% of the financing, the source close to the situation said. The lender added that the larger PE firms have the capital for the equity investment, with a minimum of a 40% equity contribution likely. A smaller equity component could also be used along with mezzanine funding but the market will be looking for at least 40%, he said.
On 11 November, Motorola was said to be exploring the sale of its largest division, which could fetch USD 4bn to USD 5bn, according to a news report. TPG and Silver Lake Partners were cited as two PE firms that could express interest in the company.
An industry banker said the unit is more likely a PE target because it’s a “large swallow” for strategic players at this time, and Motorola would have difficulty getting its asking price from a competitor. Strategic buyers such as Asian-based Samsung Electronics, Huawei Technologies along with European-based Ericsson and Pace were said to be potential suitors, according to the same news report.
Motorola is a company in a state of perpetual strategic flux. In August, this news service reported that the technology company was receiving interest for its public safety business. The industry banker said prospective buyers had courted both units in the past, but Motorola waited to determine if it needed resources to invest in its handset business, a process it is still attempting to complete.
Tech PE firms appear to have provided a very compelling argument to Motorola on the merits for exploring the sale of the home-and-networks business, which includes the set-top box business, the source said. This division was long considered an important cornerstone of the technology company’s turnaround efforts and would be a platform for growth in the future.
However, while the set-top box business is performing well, it is threatened by open access to the network, where consumers will be able to bring their own device into the home, the source said. The industry is migrating to a model where consumers will be able to go to the local electronics store to purchase their box or they will simply decide to use the Internet with greater frequency to retrieve their content.
Companies like Pace are allowing customers to bring their own device into the home and NDS provides conditional access cards which are basically a pass that enables televisions to perform the same functions as a set-top box, the source said. Therefore, the question becomes do consumers need set-top boxes whose purpose is to provide scrambling and security capabilities that can be provided elsewhere.
PE buyers are attracted to this asset because the business is likely to have a “long tail,” where revenue will decline over a number of years yet produce plenty of cash flow to reduce the debt used to finance the purchase and provide a return to investors, the source said.
If Motorola goes this route, it will likely focus on the public safety and the Symbol business as its core businesses, with the latter being purchased in 2006. In both businesses, it has a strong competitive position and should be able to grow over time, the source noted.
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