Wednesday, October 27, 2010

Carlyle Takes Out CommScope for $3.9 billion

The Carlyle Group will buy out CommScope, a maker of telecommunications equipment, for $3.9 billion.  SEC filings show the deal has committed financing, but does not reveal how much is equity vs. debt.  The DEF 14a, yet to be submitted, may detail the financing mix. 

Bloomberg reported:

CommScope, based in Hickory, North Carolina, is working to revive sales after the global recession hurt demand last year. Carlyle is banking on an increase in demand for fiber-optic networks as phone- and Internet-service providers update their systems to accommodate increasing amounts of video and data. .

Carlyle is in a position to know about growing data needs from affiliate Coresite Realty, a data center provider.  How much does Coresite buy from CommScope?  Only the private equity underwriter (PEU) knows.

As for CommScope's sales, here are the last eight quarters:

1st quarter '09--$742 million
2nd quarter '09-- $783 million
3rd quarter '09-- $750 million
4th quarter '09--$748 million
1st quarter '10--$721 million
2nd quarter '10-- $838 million
3rd quarter '10-- $821 million
4th quarter '10--$730 -780 million (projected)

While revenues bounce around significantly, is there incentive to push revenue into 2011, when the firm is private?

Financial filings reveal other interesting features. CommScope lost a patent infringement lawsuit and faces a judgment of $48 million and an injunction on further sales.  The case is under appeal with U.S. Court of Appeals for the Federal Circuit.

Carlyle is renowned for its political connections. While these aren't supposed to extend to courts, judges generally have a Red or Blue bent.  Carlyle plays both sides of the political divide.  While influence peddling is unseemly to the average citizen, it is a time honored tradition in our nation's capital.  Carlyle co-founder William Conway loves a field tilted in his PEU's favor.

CommScope could benefit from health reform's ERRP, early retiree reinsurance program.  Uncle Sam reimburses 25 to 35% of retiree medical expenses.  Commscope's non-pension retirement expenses are roughly $3 million a year.  I can't imagine Carlyle turning down a free $1 million a year from HHS, but so far, CommScope has not made the official ERRP list..

CommScope has foreign subsidiaries, including ones in China and Mauritius.  Carlyle loves China, as well as offshore tax havens like Mauritius.  It remains to be seen how many Carlyle Cayman Island funds will beneficially hold stock in CommScope.  None of this may be news, given it's now a mainstream PEU world.