Harmonic Down-2: Divicom Deal Hard To Judge,Says Analyst
By Tom Locke
10/28/1999
Dow Jones News Service
(Copyright (c) 1999, Dow Jones & Company, Inc.)
DENVER -(Dow Jones)- Harmonic Inc. (HLIT) shares were down 17% recently in the wake of the company's announcement after markets closed Wednesday that it had reached an agreement to acquire the Divicom unit of C-Cube Microsystems Inc. (CUBE).
Two analysts, Eugene Robinson of Hilliard Lyons and Charles Kaplan of Herzog Heine Geduld, attributed the drop to the acquisition announcement. However, both said they hadn't had time to analyze the merits of the acquisition or the $1.7 billion stock-for-stock purchase price.
"It's very difficult to evaluate," Kaplan said. That's partly because the companies are in an emerging-technology area - broadcasting digital video and other information over fiber-optic cable - and there are many variables to consider, he said.
In its press release Wednesday, Harmonic indicated that the union would combine Divicom 's strength in digital video compression with Harmonic 's strength in new fiber-optic technology.
An executive at Harmonic , of Sunnyvale, Calif., wasn't immediately available for comment.
Under the deal, C-Cube will sell or spin off its semiconductor division and then Harmonic will acquire Divicom , of Milpitas, Calif., through a merger of C-Cube into Harmonic.
C-Cube shareholders would get 0.5427 share of Harmonic for each C - Cube share. Based on Harmonic 's Oct. 26 closing price of 64 7/8, the deal would be valued at $1.7 billion.
For the nine months ending Sept. 30, Divicom had revenue of $133.8 million and operating income of $20.5 million.
Harmonic shares recently were down 9 15/16, or 16.6%, at 49 15/16, on Nasdaq volume of 7.1 million, far heavier than the average volume of 1 million.
Harmonic Chief Financial Officer Robin Dickson told Dow Jones Newswires he has talked with investors since the announcement of the proposed Divicom acquisition and he's noticed that Divicom is "not terribly well understood."
The purchase price of $1.7 billion in stock represents about a 44% interest in Harmonic , but Dickson said Divicom is comparable to Harmonic in terms of number of employees, revenue and earnings. "We don't think it's out of line from a valuation perspective," he said.
Dickson anticipates that the acquisition, which is expected to close in March, will add "at least 5% to 10%" to Harmonic 's earnings per share in 2000. That excludes goodwill amortization for the transaction, which for accounting purposes is being handled as a purchase, not a pooling of interests. But that estimate also excludes any synergies from the acquisition, Dickson said. "We think it could be higher (than 5% to 10%)," he said.
For 2000, the First Call/Thomson Financial consensus earnings estimate for Harmonic was 86 cents a share as of the last revision on Oct. 21.
Because Divicom is a unit of C - Cube rather than a standalone entity, it hasn't had much exposure in the investment community, Dickson said, and it is up to Harmonic to show investors why the acquisition fits strategically.
Harmonic 's core business has been in providing transmitters and receivers to cable TV companies for their fiber-optic cable. The transmitter is put in the cable company's head-end, where the cable company receives programming via satellite. The receiver is placed at the end of the fiber-optic cable, typically on a telephone pole. From there the signal is carried by coaxial cable to homes of cable TV subscribers.
Divicom 's business, on the other hand, has been concentrated on "massaging the content" of signals, such as providing compression that allows more information to be carried over a certain amount of bandwidth, according to Dickson.
The acquisition allows Harmonic the opportunity for sales of Divicom products in the cable TV industry, which Divicom was just entering. And it gives Harmonic products easier entry into the direct broadcast satellite (DBS) and telephone company markets, where Divicom has been concentrating, Dickson said.
After having fallen as low as 47 Thursday, Harmonic shares closed at 52 1/2, down 7 3/8, or 12.3%, on volume of 8.8 million shares compared with average daily volume of 1 million shares.
-Tom Locke; Dow Jones Newswires; 303-293-9294
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