The first thing that investors in Pace should know, before they crack open the champagne, is that the purchase by Arris, quoted on Nasdaq, is a long way from being a done deal. The combined entity will have an estimated 70 per cent to 80 per cent of the set-top box (STB) market sold to US cable networks.
There are not that many buyers. Pace is reckoned to get half its revenues from Comcast, AT&T and DirecTV. The last two are merging, and Arris does not supply DirecTV, so the combined group might raise sales there. The biggest customer is reckoned to be Comcast, and it may take a dim view and complain to the regulator. This is a tax inversion deal, with the new company domiciled in the UK to save tax, and such are not popular in the US.
There is every chance, then, that the US regulator may block the deal. Indeed, one analyst puts the chance of success at 80 per cent.
The deal is an opportune one for Pace. The company, an erratic performer in the past, has an excellent record in terms of shareholder returns and cash generation under Mike Pulli, the chief executive, who was appointed more than three years ago. There have been concerns, though, about a shift in the market away from STBs.
The terms on offer are rather better than was apparent when the deal was announced on Wednesday night, because of the rise since in the Arris share price. This was becauseof the synergies Arris says the deal offers, equivalent to about 0.45 to 0.55 cents a share.
Some of this, and it is not being broken down, comes from those tax benefits. Pace was making it clear yesterday that it has a good future as an independent company, as indeed one would expect it to say given the dangers of the deal failing.
The trading statement accompanying the annual meeting showed revenues, margins and profits for the first quarter heading in the right direction.
For investors in Pace, up 115p at 447p, the choice is clear. You can stay in, end up with shares in a Nasdaq company that may be difficult to sell, and risk the deal falling apart. Alternatively, the risk-averse might take profits in the market, even if this will not quite take you back to where the shares were a year ago.
My advice Take profits
Why Pace investors have seen a good uplift. There is no certainty that the deal will gain US regulatory approval, given high market share
Pace share in merged group 24%
Computacenter’s sale of a peripheral business involved in disposal and recycling in February happened to coincide with the latest special return to shareholders, worth £100 million against a disposal price of £56 million. The latest trading update suggests the cash is still piling up.
This is one of the attractions of the shares, because the business of supplying IT services and equipment to corporates is highly cash-generative. The company was sounding cautious about the present year, though, because it has been adding new business and this typically takes a few months to get to peak workload.
There is also the danger that a new contract may go wrong, as happened in Germany. This and France continue to lag behind, Germany getting better but France still loss-making. With half of revenues in the eurozone, the fall in that currency will be a drag, but the effect on profits will be less because of lower profitability there.
Profits this year will be largely unchanged because of that disposal but will rebound in 2016 as new work comes through. The shares, off 4p at 674p, sell on 14 times earnings and are worth buying for future returns.
Revenue £715.9m, down 2%
My advice Buy
Why Prospect of greater returns from cash generation
The bookie wins in the end. As one analyst put it, the loss that William Hill suffered from unfavourable football results in January, a £21 million swing on profits, will be made up in due course by a run of favourable sporting fixtures. It just hasn’t happened yet.
That is the long-term view. The gaming industry, though, is facing a series of uncertainties that looks to some observers unprecedented. William Hill’s quarterly update is similar to the one from Ladbrokes the previous day, except that it seems to have had a better Cheltenham. The known unknowns are the same for both.
This is reflected in the wide range of forecast profits for the present year from analysts; frankly, though, forecasting seems pointless. The government’s attempt to curb problem machine gamblers has required Hill to institute a “£50 journey” in its shops, which means they have to be monitored more closely.
The impact of this is impossible to forecast, though logic suggests a negative. The second imponderable is the effect of a Labour government, again impossible to quantify.
Hill said that its UK operations improved after January — they could hardly have got worse. In Australia, the company is coming to the end of migrating customers to its platform from sportingbet’s, disruption that is coinciding with changes to the law that are requiring it to reshuffle its customer base.
The shares, off 11p at 361¼p, sell on 15 times earnings. As with Ladbrokes, the uncertainties do not recommend a purchase.
Additional tax in quarter £20m
My advice Avoid for now
Why Uncertainties are too high in advance of the
And finally . . .
Another positive trading update arrives from Bodycote, from the annual meeting. Revenues from aerospace, defence and energy were up in the first quarter, weakness in onshore oil and gas more than offset by large subsea projects. The board tends to be cautious and warns again that there is little forward visibility of earnings, but expectations for this year are unchanged. Bodycote’s resilience to global economic trends were one reason why I tipped the shares for this year; they are up 9 per cent so far.
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