ARRS Arris International Plc - Ordinary Shares

Yesterday, in a major strategic move, Arris Group Inc. (ARRS) announced that it has restructured its business model and provided the future financial guidance. The restructuring was necessary after its acquisition of the Home businesses of Motorola Mobility, a subsidiary of Google Inc. (GOOG) in Apr. 2013.

From the second quarter of 2013, Arris will report in two business segments instead of the current three business segments. The new segments will be Network & Cloud and CPE (Customer Premises Equipments). The Network & Cloud segment will include Arris’ existing CMTS EMP, Access, Transport & Supplies, Media & Communication Systems products. This segment will also include Arris’ Home, Video, head-end, CMTS and the converged products. On the other hand, the CPE segment will represent Cable and DSL modems, EMTAs, gateways and set-top boxes of both Arris and Motorola Mobility.

Management estimated that for the ensuing second-quarter 2013, non-GAAP total revenue will be $1.028 - $1.078 billion and non-GAAP earnings per share will be 6 cents – 13 cents. Management also targeted annual revenues of $4.8 - $5.1 billion and earnings per share of $2 - $2.15 after one year of Motorola Mobility acquisition. The merged entity is expected to generate a cost synergy of $100 - $125 million per annum.

In relation to the above-mentioned proposed merger, in Jan 2013, Arris sold approximately 10.6 million of its common stock to Comcast Corp. (CMCSA) for a consideration of about $150 million. The Motorola Mobility acquisition deal worth $2.35 billion was financed in cash by $2.05 billion. Initially, it was decided that Google will get the remaining $300 million worth of Arris’ common stocks. The Comcast deal has reduced the total number of Arris’ shares to be issued to Google while raising the cash consideration by $150 million.

Consequently, both Comcast and Google will command 7.85% of the total outstanding shares of Arris. Importantly, through this deal, Arris will get two large investors namely, Comcast and Google. These companies have financial interest in the success of Arris’ cable set top box venture. Notably, Comcast is the largest customer of Arris.

With Motorola Mobility’s Cable Home business in its portfolio, Arris is likely to become a formidable player in the video infrastructure and CPE for the cable TV industry. A report of Infonetics Research Inc. stated that the combined Arris/Motorola constituted 45% of the DOCSIS 3.0 CPE market share in 2012. This figure is well above the second ranked Cisco System Inc.’s (CSCO) 15% market share.

Synergy Research Group stated that the Arris/Motorola tie-up may pose serious competitive pressure on Cisco in the video infrastructure market. In 2012, Cisco’s market share in this segment was 21% followed by 12% of the combined Arris/Motorola market share.

 
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