Attractive and accretive deal for Arris, which has gone through massive M&A expansion since 2012 (if successful in closing this deal, it will have grown revenues to more than USD 8bn vs USD 1.35bn) and which will solidify ARRIS’ position in the set top box market, with the combined company controlling about 25% of the global market (with the next largest competitors Samsung and Cisco each at 7.2% of the market): accretion of deal is driven by both tax and operational synergies: out of targeted USD 0.45-0.55 EPS or 15-25% accretion, slightly more than half of USD 0.25-0.30 accretion is driven by operational synergies and USD 0.20-0.30 driven by tax synergies.

HOWEVER unattractive situation given a) long dated 9 month political US headline driven inversion (similar as Synergy/STE) where bidder shareholder vote will be aligned with UK target vote at back end tail of deal ; b) large US driven antitrust as combination of Pace and Arris will have a very high share of Set-Top Boxes s used in US cable networks (broad estimate would be the 70-80% range), with potential complaints by Comcast and AT&T who are major customers to both Pace and Arris; and c) deal is driven by weakness as their combined large customers have been pressuring the margins and setup box business is in slight peril as customers are moving to watching online video and on mobile devices away from their TV sets.

Currently trades about 15% spread based on ARRS USD 38 price (after ARRS shot up 24% in after hours after deal announcement), however think ARRS share price will give up 5-10% of that move towards USD 35 today, implying 9% net spread with Pace currently trading at GBP 4.40which seems fair.

We would much more rather recommend touching and setting up Synergy Health/Steris deal terms- which trades at 4% spread or more than 25% annualised for much more short dated inversion headline risk and much lower antitrust risk than this Pace deal.