July 26, 2010 / 9:13 AM / 9 years ago

Pace buys U.S. broadband co 2Wire for $475 mln

LONDON (Reuters) - Pace PIC.L, the world’s largest set-top box maker, has agreed to buy U.S. broadband technology firm 2Wire for $475 million to broaden its customer base beyond cable and satellite into the Internet TV market.

The British firm, which overtook Motorola MOT.N to claim the top spot in May, said 2Wire supplied AT&T (T.N) and the deal would catapult it to number three in the global home-hub market.

Analysts at J.P.Morgan Cazenove said they saw the deal adding 12 percent to forecast earnings in 2011 and 18 percent in 2012. The company’s first-half results, which beat Cazenove’s forecasts, alone justified a re-rating of the shares, they added.

“The acquisition of 2wire is important for two reasons in our view: first it allows Pace to enter a new market and supply U.S. telcos, and second it adds further software and gateway expertise to further strengthen the company’s leading position in converged devices,” they said.

Pace Chief Executive Neil Gaydon said: “We have built a strong position in the U.S. 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 U.S. operator requirements.”

Investors welcomed the move by the Yorkshire, northern England-based company, marking the company’s shares up as much as 8 percent to a near-five month high.

Before the deal, Pace’s Internet TV business was dwarfed by its cable and satellite operations, where it makes set-top boxes for Canal+ CNLP.PA and Comcast (CMCSA.O).

Gaydon said broadband delivery would become more popular in high-spending, competitive markets like the United States.

“The residential gateway market today is about $3 billion globally, it will grow in the next three to four years to nearly $7 billion,” he told reporters on Monday.

“We see this market of combined media gateway, video, broadband, voice-over IP and full managed services throughout the home as a three-four year play.”

San Jose, CA-based 2Wire is owned by a consortium including Alcatel-Lucent ALUA.PA, AT&T, Telmex TLX.SN and Oak Investment Partners, and had sales of $667.4 million in the 12 months to end-December 2009.

SUPPLY-CHAIN SQUEEZE

Shares in Pace, which also posted a 46 percent rise in pretax profit for the first half on Monday, were 6.9 percent higher by 0856 GMT, the top riser in a flat index of medium-sized companies .FTMC.

Pace posted pretax profit of 45.4 million pounds ($70.1 million) on 21 percent higher revenue of 635.2 million pounds in the six months to end-June, and said it was close to achieving its 8 percent operating-margin target.

Gaydon said the results would have been slightly better were it not for supply shortages.

“It’s very tight,” he said. “The lead times are pushing out if anything. We are working closely with our customers and the supply chain to manage a situation which is not getting better and doesn’t look like it will get any better for the next 18 months.”

Gaydon said demand for high-definition TV was boosted by the soccer World Cup, which finished earlier this month.

“Rather than the World Cup being a bubble it’s actually been a platform for further growth,” he said. “The market’s growing and we’re continuing to grow.”

Pace said given its strong position and ongoing demand for digital television, it should deliver mid-single digit revenue growth over the medium term. (Editing by Sharon Lindores, Mike Nesbit) ($1=.6473 pounds)

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