ARRS Arris International Plc - Ordinary Shares

Cable equipment manufacturer Arris Group Inc. (ARRS) has fixed a rate it will pay on its $925 million term loan, which the company is raising to finance the acquisition of Google Inc.’s (GOOG) Motorola Mobility’s Home business. On Dec 19 2012, Arris agreed to purchase Motorola’s set top box (STB) business in a cash and stock deal worth $2.35 billion.

Per the deal, Arris will pay $2.05 billion in cash and $300 million in newly issued shares of the company. To raise the said money the company has decided to take a five-year $1,000 million term loan A, a seven-year $925 million term loan B and a $250 million of revolving credit facility with a maturity period of five years. 

The company has decided to pay an extra 2.75-3% point over Libor (London interbank offered rate) for its seven-year term B loan worth $925 million. Significantly, Arris is getting the term loan at a discounted rate, which in turn will have a less impact on its margins. Bank of America (BAC) and Royal Bank of Canada are handling the financing for the cable equipment manufacturer.

Notably, on May last year, Google acquired a 100% stake in Motorola Mobility business to compete more efficiently with other handset manufacturers as the smartphone battle intensifies around the world. However, Google was not much interested in Motorola’s STB business and put up the division for sale on Dec 7, 2012.

According to research firm IDC, global STB market is set to register 5.6% compounded annual growth over the 2010-2015 period, mainly attributable to worldwide expansion of pay TV service. We believe acquiring the STB business makes sense for Arris as it will have access to Motorola’s wider market and expanded customer base. Following the completion of the deal, Arris will become a dominant CMTS (cable modem transmission system) player behind market leader Cisco Systems Inc. (CSCO).

Motorola’s home business will considerably increase Arris’s topline and will generate more than $100 million in cost synergies. Nevertheless, undertaking such a huge loan for a company that has a low debt may considerably increase its leverage position.

Currently Arris Group Inc. carries a Zacks Rank #2 (Buy).

 
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