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Why Shares of CommScope Holding Co. Tumbled Today

By Timothy Green - Nov 8, 2018 at 2:45PM

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A big acquisition will greatly increase the company's debt load.

What happened

Shares of CommScope Holding Company (COMM 4.37%) slumped on Thursday after the communications infrastructure solutions provider reported its third-quarter results and announced the acquisition of Arris International (ARRS). CommScope stock was down 22.3% at 2 p.m. EST, while shares of Arris were up 10.1%.

So what

CommScope reported third-quarter revenue of $1.15 billion, up 1.9% year over year but $70 million below the average analyst estimate. Non-GAAP earnings per share came in at $0.59, up from $0.55 in the prior-year period but $0.07 below analyst expectations.

A notepad drawing of a fish eating a smaller fish.

Image source: Getty Images.

On top of announcing its third-quarter results, CommScope said that it had agreed to acquire telecommunications equipment manufacturer Arris International in a $7.4 billion all-cash deal. Arris shareholders will receive $31.75 for each share of Arris stock.

The deal should push CommScope's annual revenue to about $11.3 billion, and the company expects to extract more than $150 million in annual cost synergies within three years. In addition, private equity company The Carlyle Group will make a $1 billion minority equity investment as part of the financing for the transaction.

Now what

The $7.4 billion price tag, which includes debt, compares with annual sales for Arris of about $6.7 billion. Arris produced free cash flow of $449 million in 2017, but its GAAP net income was just $92 million.

The steep decline in CommScope stock on Thursday may be due to the company's lackluster third-quarter results, but investors may also not like the size of this deal. CommScope will take on $6.3 billion of debt to finance the transaction, adding to the nearly $4 billion of debt already on the books.

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Stocks Mentioned

ARRIS International plc Stock Quote
ARRIS International plc
ARRS
CommScope Holding Company, Inc. Stock Quote
CommScope Holding Company, Inc.
COMM
$7.16 (4.37%) $0.30

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