Pace targets US market with 2Wire buy
Financial Times (London)
By Philip Stafford
Published: July 26 2010 22:33 | Last updated: July 26 2010 22:33
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. 
Pace gets US triple-play with $475m 2Wire buy
Financial Times (London)
July 26, 2010 8:50 am
by Chris Nuttall
Pace has announced a proposed $475m acquisition of Silicon Valley’s 2Wire, in a move that will add telecom companies to the number-one set-top box maker’s existing cable and satellite customers in the US.
Pace going for a triple-play of industries to serve is another sign of the major strategic shifts taking place as different sectors converge on delivering content and services to consumers over the internet.
Earlier indications of this included Walmart buying Vudu‘s “over-the-top” internet video service, Sonic Solutions buying DivX , Sigma Designs acquiring CopperGate and Google TV bringing together Google, Intel, Sony, Logitech, Dish Network and Best Buy with a new vision of “smart TV”.
Pace’s move to acquire 2Wire will mean it has all bases covered in terms of serving the traditional industries as they compete against new internet rivals.
Pace said the addition of 2Wire would make it the number one provider of telco residential gateway devices in the US and the number three globally.
You won’t have seen 2Wire’s products in any stores. While the likes of Netgear and Cisco’s Linksys have sold consumers routers to set-up Wi-Fi networks in their homes, 2Wire has focused on providing its routers directly to telcos. They issue them to customers as they sign up for internet services.
2Wire’s “residential gateway” routers are becoming ever more sophisticated, with add-ons that can provide network storage, internet telephony and content services.
Cisco is understood to have considered an offer for the company in the past and China’s Huawei more recently, but the Pace deal makes more strategic sense.
AT&T is 2Wire’s biggest customer – its broadband gateways help to deliver AT&T’s U-verse services such as multiroom HD TV, high-speed broadband and telephony. AT&T also has a stake in the company, as part of a consortium of investors including Alcatel-Lucent, Telmex, Oak Investment Partners, Meritech Capital Partners, and Technology Crossover Ventures.
“This acquisition will strengthen our Americas business, extending Pace’s US market coverage with entry into the tier one telco market,” said Neil Gaydon, Pace chief executive, in a statement.
“2Wire’s software and gateway expertise will further drive development of our home entertainment convergence strategy.”
The deal is expected to close in the fourth quarter, subject to regulatory consents and Pace and 2Wire shareholder approval. 2Wire reported sales worth $667m last year and profits before tax of $29m. Pace expects the acquisition “to be earnings and cashflow enhancing …in the first full financial year of ownership”.
Pace also unveiled first-half earnings figures on Monday. The world’s biggest supplier of digital set top boxes said sales grew 21 per cent on a year ago to £635m and profits before tax were up 46 per cent at £45m. 
Pace plc – Proposed Acquisition of 2Wire, Inc. and Notice of General Meeting
1 October 2010
To Shareholders, and for information only, to holders of awards under the Share Plans
Proposed acquisition of 2Wire, Inc.
On 26 July 2010, Pace announced its proposed acquisition of the 2Wire Group, a leading provider of advanced residential Gateways and associated software and services for the broadband service provider market, for a total cash consideration of $475 million (£301 million). The acquisition price is inclusive of 2Wire’s balance sheet cash at Completion, anticipated to be approximately $55 million (£35 million). The terms and conditions of the Acquisition are contained in the Merger Agreement which is summarised in Part VI of this document. Due to its size, the Acquisition requires the approval of Pace Shareholders at the General Meeting to be held on 18 October 2010. The notice of General Meeting is set out on pages 85–86 of this document.
I am writing to give you further details of the Acquisition, including the background to and reasons for it, to explain why your Board considers the Acquisition to be in the best interests of Pace and to recommend that you vote in favour of the Resolutions.
2. RATIONALE FOR THE ACQUISITION
Pace is a leading technology developer for the global payTV market and was recently recognised as the world’s largest supplier of digital set-top box technology. Pace supplies world leading operators with innovative products and technologies that deliver TV-led entertainment services.
Pace’s primary strategic objectives are to be the world’s best set-top box company and to build a leadership position in the technologies, services and products that deliver digital TV and converged home entertainment. The Company aims to achieve those objectives through organic development, complemented by disciplined acquisitions that deliver a strong geographic and customer fit, broaden the scale and technology capability of the business and are financially sound propositions.
Pace has a strong track record of delivery against its financial and strategic goals and the Company has demonstrated its ability to successfully grow its business and manage the integration process following strategically important transactions. Pace’s acquisition of the Philips’ set-top box business in 2008 enhanced the shape and scale of its business and the more recent acquisition of Bewan in April 2010 extended Pace’s technology capability into Gateways. Pace believes that in the world’s most developed markets its customers’ TV-led home entertainment and broadband services are moving towards integrated, converged offerings, making Gateway devices and the related software, applications and services increasingly important. In this context, know-how and experience with both service providers and end-users is a vital and key competitive differentiator, with the world’s largest telcos and other service providers recognising value in the ability of their suppliers to provide a converged services offering.
The Board believes the Acquisition represents a logical extension of Pace’s group strategy, enhancing Pace’s successful US business in cable and satellite markets with an entry into the rapidly growing tier one telco residential Gateway market. At the same time, 2Wire’s software and Gateway expertise will support Pace’s development of its home entertainment convergence strategy.
Pace and 2Wire benefit from a complementary set of customer relationships. 2Wire’s customers are primarily Americas based telcos, while Pace enjoys strong relationships with cable and satellite providers in the US and globally. Following Completion, Pace will become the number one provider of telco residential Gateway devices in the US and the number three globally. The global market for DSL and fibre based Gateways is expected to grow from $3.0 billion in 2009 to $6.7 billion by 2014, a compound annual growth rate of approximately 17%.
Your attention is drawn to the section headed ‘‘Risk Factors’’ in Part II of this document.
3. INFORMATION ON 2WIRE
2Wire is a US based provider of broadband solutions whose products and services include residential Gateways, multi-service media platforms, remote management systems, value-added services and customer support.
2Wire was founded in 1998 and launched its first residential Gateway product in 2000. Its headquarters are in San Jose, California and it has additional US offices in Nevada City, California; Phoenix and Tempe, Arizona; Austin and San Antonio, Texas; and Atlanta, Georgia.
Across the globe, 2Wire is represented in India, China, France, Germany, Hong Kong, Latin America, Singapore and the United Kingdom. It employs approximately 1,000 employees globally, including approximately 550 in research and development, sales and administration and factory support and approximately 440 in customer care. In addition, 2Wire has approximately 600 agency staff working in its call centres. 2Wire is currently owned by a consortium including Alcatel-Lucent, AT&T, Telmex and Oak Investment Partners. 2Wire has established customer relationships in the tier one telco market, in particular with service providers in North America and is the number one supplier to the fast growing US telco residential market. AT&T has been a customer of 2Wire for 10 years and 2Wire provides software and hardware solutions to enable AT&T’s U-verse suite of services which includes multiroom high definition TV, high-speed broadband and telephony. AT&T is 2Wire’s largest customer representing approximately 64% of revenue for the 12 months to 31 December 2009. 2Wire’s other customers include some of the leading service providers throughout the US, Canada, Latin America, Europe, Australia and Asia, including Telmex, BT, CenturyLink, Bell Canada and SingTel.
2Wire’s end-to-end solutions are engineered for the service provider and optimised for the subscriber. While 2Wire’s residential Gateways are at the core of its product offering, its device software and management software are vital components required to manage the increasing complexity of the digital home.
The main components of these offerings are outlined below:
An extensive range of Gateway devices, from standard ADSL value orientated solutions to highly advanced, outdoor, VDSL2 bonded implementations. As of 30 June 2010, 2Wire had shipped over 31 million managed Gateways and is the number one provider of DSL Gateway devices in the Americas and the number one supplier worldwide of next-generation VDSL Gateway devices.
Software and applications platforms
Device firmware application software, device management systems, service management systems, software development kits, service analytics tools and customer care tools.
An extensive suite of services including customer care, professional services, hosting services and return merchandise authorisation services.
(Shareholder circular document in full at )