You are what you eat

Antec acquires, assumes identity of Arris Children should surpass their parents and students, their teachers. How else will anything progress?

That old axiom was validated last week in the communications sector when Antec, a cable, power and optical equipment provider, announced plans to acquire Arris Interactive, a company it co-founded with Nortel Networks in 1995.

The deal is expected to close in the first quarter of next year, at which time Antec will focus more on the local cable broadband access equipment offerings of Arris Interactive and change its name to Arris. Despite the changes, neither company will discontinue any part of its portfolio.

Currently, Antec owns 18.75% of Arris Interactive and is the sole domestic distributor of the venture's products, while Nortel owns 81.25% and has exclusive rights to the international market.

Under terms of the agreement, Nortel will sell its interest in Arris Interactive to Antec in exchange for about $325 million in cash and 33 million shares of Antec common stock, which will give Nortel 46.5% ownership of the new Arris. Arris Interactive last year had revenues of $329 million. In the first half of 2000, revenues reached $254 million. About one-half of revenues during these periods were from sales to Antec.

About 30% of Antec's 1999 revenues were generated from the sale of local cable access equipment provided by Arris, said Jim Bauer, Antec's head of investor relations. After the deal, local cable access equipment will account for about 50% of the company's revenues, he added. Antec made the deal to solidify its position in the cable Internet and cable telephony markets, expecting that consumer demand in those areas will grow in coming years.

"This transaction represents a hairpin turn in the history of Antec Corporation.... No longer will we just distribute Arris products; we will be the new Arris," said Bob Stanzione, president and CEO of Antec, who will retain those positions after the transaction closes.

The deal was announced as Antec reported missing estimates for the third quarter and gave downward guidance for the next quarter and year, resulting in the more than 40% decline of Antec's stock in one day.

Some Wall Street analysts, however, feel that the large-scale selloff of Antec stock was short-sighted. "My advice to our investors is that this deal is very positive. Before the deal you were a shareholder in a mid-sized, Duluth, Ga.,-based cable equipment company. After, you become a partner of Nortel's global cable-equipment business," said Barry Sine, telecom equipment analyst with investment bank Kaufman Bros.

Jim Jungjohann, a research analyst with CIBC World Markets, agrees. "We truly believe that this transaction is the needed inflection point for the long-term prospects of Antec shareholders," he said.

Unlocking the value of Arris Interactive is one motivation for the deal. Much of the company's worth has been obscured due to the reporting methods and the revenue split between Antec and Nortel.

"Arris' results, and therefore its full value, have been somewhat hidden...," Stanzione said. "The Arris joint venture financials, including a significant international business, were buried in Nortel's financial statements. Now we will essentially take Arris public, exposing its full value to the market."

Though Antec is positioning itself to take full advantage of the cable Internet and telephony markets, questions remain whether those markets will be big enough to support the merged company.

But Sine believes cable Internet is a solid bet for the future, especially with the current woes confronting DSL. "Customers want broadband access to the Internet. DSL hasn't shown a tremendous ability to get it there. Whoever gets there first is going to get a tremendous chunk of the market, and cable's already doing that," he said.