Consolidation in test and measurement market after grim 2023, partly bankrolled by private investment in public equity via Silver Lake
The US’ Viavi Solutions intends to acquire the UK’s Spirent Communications for £1 billion (€1.17 billion). The announcement caused Spirent’s shares to rise by 62%, reaching levels not seen since last summer.
The news came as Spirent announced its annual financial results for 2023 which showed a 22% drop in revenues to $474.3 million (€437 million compared with the previous year. Adjusted operating profit fell by 65.1% to $45.2 million.
Spirent’s CEO Eric Updyke commented: “As we progressed through 2023, the market landscape became increasingly challenging. The elevated prevailing interest rates and inflationary pressures impacted customers, especially those in the telecommunications sector.
“These customers responded by taking significant action, particularly in the second half of 2023, to cut costs and by reducing their capital expenditure to preserve cash.”
He pointed out that Spirent has signed new 5G and Open RAN contracts, and looked to expand its business outside the telecoms sector, for example securing an important deal in financial services and ongoing success with hyperscaler customers.
Oleg Khaykin, President and CEO of Viavi, noted, “Combining our leading communications test and measurement and optical technologies and Spirent’s high-performance testing and assurance solutions is expected to deliver enhanced product solutions and applications, accelerate growth in new markets and strengthen innovation through expanded engineering and design capabilities.”
British firms are cheap
The companies said in a statement, “Spirent’s product offerings and technological assets are highly complementary and synergistic to Viavi’s existing portfolio, which will enable the Combined Group to deliver high performance, integrated solutions for networking and mission critical applications, including 5G and 6G wireless infrastructure.”
The deal is attractive as now both companies gain exposure to each other’s customer base and there is project reduction of $75 million in operating costs. As the Financial Times [subscription needed] pointed out, this is about half of Spirent’s 2023 earnings beforeinterest, taxes, depreciation, and amortisation (EBIDTA).
The acquisition will be funded by cash Viavi holds, an $800m seven-year term loan from Wells Fargo Bank, and a $400m investment from Silver Lake in the form of a convertible note. Ken Hao, Chairman and Managing Partner of Silver Lake, will join the Viavi board of directors.
PIPE might become more common
The deal is also interesting because it will be financed in part by a $400 million convertible loan from private equity firm Silver Lake. Such deals are known as private investments in public equity (PIPE) and relatively common in the US.
Private equity firms are insulated from a deal going wrong while gaining a route into a company’s share capital. Silver Lake eventually acquired Germany’s Software AG but started in the same way as the Spirent deal is structured.
Viavi would have found it difficult to fund the deal with straight debt as it too is experiencing tough times due to market conditions, with its projected 2024 EBIDTA expected to be $165 million, compared with from $260 million in 2022.
There is a spate of oversees companies bidding for low-priced British firms as the country continues to struggle with the aftermath of Brexit, low pound and a floundering economy.