Arris chief plays down tax perks of Pace deal

The head of US networking equipment maker Arris has defended his company's £1.55bn takeover of UK rival Pace, brushing aside concerns that it is an attempt to escape US corporate taxes.

Bob Stanzione, chairman and chief executive of Arris, which is based in Suwanee, Georgia, said the takeover of Pace was driven primarily by a strategic rationale.

But he admitted tax considerations were an important way for Arris to "optimise the deal to make returns for shareholders".

The takeover - unveiled on Wednesday night - is the latest so-called tax inversion whereby a US company uses a foreign acquisition to set up a new corporate domicile outside the US to lower its overall tax rate.

After a series of both high-profile and smaller tax inversion deals, the US government moved to slow the rate of companies pursuing these deals last year.

US president Barack Obama criticised such deals last summer, calling them "unpatriotic", and the US Treasury took steps in September to curb their attractiveness.

Mr Stanzione told the Financial Times: "I don't believe it's unpatriotic in any way, shape or form, to take the company and make it stronger . . . I work for the shareholders and they expect us to structure the company in a way that makes the highest return."

Arris, which did not disclose the amount of cost savings it expects to make from the deal, said its overall tax rate should fall from 35 per cent to between 26 per cent and 28 per cent in the first full year following the takeover.

Shares in Arris, which will keep its US listing, closed up 22 per cent at $37.30 in New York trading on Thursday, as investors supported the deal. The gains gave it a market capitalisation of $5.3bn.

Pace shares rose 35 per cent to 448.50p.

Shareholders in the Yorkshire-based company will receive 132.5p in cash and 0.1455 in new shares, approximately valuing the Arris offer at current market prices at £1.55bn.

The cash and stock offer is structured so that Pace investors will own 24 per cent of the shares in the combined business, satisfying the requirements that allow Arris to pursue an inversion.

The deal to acquire Pace comes as the biggest customers to both companies are in the process of closing their own megamergers.

Arris makes TV networking equipment for the likes of Comcast and Time Warner Cable, which are attempting to secure US regulatory clearance to close their deal to create a dominant cable provider in the US. Pace serves AT&T and DirecTV, which are also closing their own combination, as well as Brazil's Oi and Sky Italia.

Mr Stanzione said the merged entity would be able to better compete against larger rivals such as Cisco Systems, at a time when the set-top box industry is coming under pressure from more people watching television on the internet and mobile devices.

"We're in a global business," he said. "It's important for companies like ours to have the wherewithal to win in the global market. By combining us with Pace, we have the scale to continue to compete and grow in that global market."

Both companies had previously been acquisitive in their attempts to gain market share. In 2012, Arris outbid Pace to buy Motorola's set-top business for $2.4bn. In 2013, Pace acquired the US equipment maker Aurora Networks in a deal worth $310m.

The transaction is conditional on antitrust clearance in the US and at least five other jurisdictions. Analysts at RBC said they did not expect the deal to face significant regulatory issues as the combined companies may have less than 50 per cent market share in set-top box making.

"Arris has a record of integrating large deals, so we're confident the $8bn combo should be synergistic," the analysts added.

Arris has indicated there will be job cuts as a result of the merger with Pace, but Mr Stanzione said these were not likely to be "severe" or disproportionately hit the UK group's operations.

But Pace faces losing executives credited with turning round the British group, considered to be in the doldrums a few years ago.

The UK group's chairman Allan Leighton, the former chief executive of Asda and former chairman of Royal Mail, will leave Pace once the takeover is complete. The fate of chief executive Mike Pulli is yet to be decided, according to people familiar with the matter.

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