Pace targets US market with 2Wire buy

Pace, the set-top box provider, is to take on Motorola in the US home networking device market after it agreed to buy California-based 2Wire for $475m (£307m) in cash.

The purchase, from a consortium that includes Alcatel-Lucent, AT&T and Telmex, will see Pace go more than £200m into debt after spending its £94m cash pile. It will allow Pace to produce devices that serve as a broadband router as well as a TV set-top box.

“What we will be able to do is unique,” said Neil Gaydon, chief executive. “No other set-top box provider will be able to supply all three transmission systems of cable, satellite and telecommunications.”

The 2Wire deal will see Pace become the largest seller of managed broadband routers in the US and the third largest globally.

The Yorkshire-based company became the world’s largest supplier of set-top boxes this year, moving ahead of Motorola and France’s Technicolor.

For the year to December 31, 2Wire made pre-tax profits of $28.9m from revenues of $667.4m. AT&T, also a 2Wire shareholder, provides up to 75 per cent of its revenues.

First-half results from Pace beat expectations and the company said it was likely to raise guidance for the full financial year, even excluding the planned 2Wire deal.

Turnover for the six months to June 30 rose 21 per cent to £635m, while pre-tax profit rose 46 per cent to £45.4m. Earnings per share rose from 7.3p to 10.2p. The interim dividend was up 45 per cent to 0.725p.

Shares in Pace closed up 26½p at 214p.

FT Comment

One of the impressive things about Mr Gaydon’s turnround has been his ability to see the bigger picture as Pace churns out high-end set-top boxes. He will need those skills in the coming months as he integrates the company’s largest acquisition to date. A stumble could see Pace playing catch-up in a competitive market while carrying £200m of debt. However, the benefits of the deal are not yet in the Pace share price. Analysts increased their forecasts by about 10 per cent on Monday and now expect the company to make pre-tax profits of about £97m from revenues of £1.3bn in 2010. That accounted for the share price rise on Monday. Early forecasts suggest the deal will increase earnings by 18 per cent. The shares are trading on a prospective 2012 price/earnings ratio of 7.5 times, which is low for the sector, even if the travails of rivals Thomson and Motorola makes a direct comparison difficult.

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