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Summary

CommScope will pay $3.0bn for TE Connectivity’s telecom, wireless, and enterprise segments, giving CommScope combined annual sales of about $5.8bn and a stronger global position in network connectivity across the wireless, wireline/broadband, and enterprise markets. Despite its low profile, connectivity accounts for 10–15% of telco capex, and this deal confirms connectivity’s high value in the telecom and datacom food chain.

Deal creates connectivity giant, raises questions for TE SubCom

This agreement is straightforward: CommScope is paying $3.0bn in cash (including new debt) for assets representing about half of TE Connectivity’s annual revenues. TE becomes a much smaller company focused on selling to OEMs and will use the cash for share buybacks, R&D, and (probably) acquisitions. CommScope becomes a relative giant in the network connectivity space, with a more balanced geographic and product mix. Post-acquisition, CommScope’s revenues will be about half wireless, 28% wireline/broadband, and 22% enterprise/data center. CommScope becomes better positioned in the fiber market against strong player Corning. The new CommScope will still be US-centric at 51% of revenues, but with gains in Europe and Asia-Pacific.

Private equity firm Carlyle, which took CommScope private in 2010 and sponsored its IPO in 2013, remains the majority shareholder. Carlyle is likely to support further acquisitions. Breadth of product lines and geographic presence matter. The new CommScope is better positioned against Huawei and will have greater traction with builders of data centers (e.g. Internet content providers such as Google and Facebook).

The CommScope-TE deal is perhaps the largest to ever occur in the network connectivity space. The only recent rival for the top spot is Prysmian’s $1.2bn purchase in 2011 of Draka Cable. More recently, Corning bought Samsung’s fiber optics business in late 2014 for an undisclosed (but likely much smaller) amount. Another small deal came in late 2014 when Huber+Suhner bought WDM specialist Cube Optics.

TE is not exiting the communications business. It will retain its undersea business, SubCom, which booked about $300m in revenues for the last fiscal year. TE’s submarine market has been weak lately due to the ease of in-service upgrades to 100G for installed networks. Alcatel-Lucent’s submarine division has also been limping along for similar reasons. It’s likely that TE and Alcatel-Lucent are talking to each other about combining their submarine assets, but their customers may not be eager to see even more concentration in this market.

Appendix

Further reading

Intelligent ODNs: Adding Smarts to FTTx Networks, TE003-000598 (February 2014)

“CommScope's S-1 filing signals that infrastructure is hot,” TE003-000571 (August 2013)

Author

Matt Walker, Principal Analyst, Intelligent Networks

matt.walker@ovum.com

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