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Strategies & Market Trends : Market Gems:Stocks w/Strong Earnings and High Tech. Rank -- Ignore unavailable to you. Want to Upgrade?

To: puborectalis who wrote (68592)	10/29/1999 12:20:00 AM
From: SMALL FRY	Read Replies (1) \| Respond to of 120523

HLIT - Here's some good reading: UNLOCKING THE VALUE: HARMONIC TO ACQUIRE DIVICOM FOR $1.5 BILLION - CUBE: Unlocking the Value: Harmonic to Acquire DiviCom for $1.5B--STRONG BUY * CUBE shareholders will receive 0.5427 shares of HLIT stock (HLIT: $59 7/8) for each share of CUBE in a tax-free swap, and also will receive 1 share in the spun-out Semiconductor unit. CUBE shareholders would thus own 44% of HLIT stock. * The acquisition of DiviCom by HLIT is expected to close by March 2000 and is pre-conditioned on the semiconductor unit being spun out or sold. * We estimate the value of the semiconductor unit at roughly $21-22 per share or $1 billion, which implies a CUBE stock price today of roughly $54, based on last night's HLIT closing price. * There is tremendous synergy in the Harmonic-DiviCom combination, in our view, and we expect the combined company to emerge as the category killer in supplying next-generation, standards-based digital video and broadband communications systems to cable, satellite and terrestrial broadcast networks. * We applaud this deal because we expect it to unlock significant value for CUBE shareholders. =============================================================================== The Deal Structure - CUBE shareholders will receive 0.5427 shares of HLIT stock for each share of CUBE in a tax-free swap, and will also receive 1 share of stock in the spun-out Semiconductor unit. The company has left open the possibility that Semiconductor could be sold rather than spun out, which could create another tax-free transaction (a spinout of semiconductor would be a taxable event for shareholders). Either way, the acquisition of DiviCom by HLIT is pre-conditioned on the semiconductor unit being spun out or sold. Subsequently, HLIT would acquire C-Cube, whose only assets would be those of DiviCom. Semiconductor Prospects Over the past year, the semiconductor business has rebounded nicely under the direction of Umesh Padval (who will assume the CEO position of the spun-out entity), showing year-over-year growth close to 50% in its key markets of DVD, set-top boxes and codecs. This robust growth is still being masked to some extent by a continued decline in VideoCD revenues from China. However, given its technology leadership, strong customer base and market momentum, we believe the company is very well positioned to grow in the neighborhood of 25% over the next 3 years. Furthermore, we fully expect the close partnership between C-Cube Semiconductor and DiviCom to continue to flourish in the set-top box and codec markets. Management announced that the two companies have signed a agreement to this effect, where the next several generations of DiviCom encoders will be built on C-Cube semiconductors. To account for the expanded business opportunities that we expect to develop through the Semiconductor division's relationship with the combined Harmonic-DiviCom, we have upped our Semiconductor revenue estimates for 2000 by $5 million, to $252 million. Together with other minor adjustments to our model, this raises our 2000 EPS estimate for CUBE as a whole to $1.55 from $1.47. So What Is the Semiconductor Unit Worth? This is the key question, in our opinion. Looking at Semiconductor on a standalone basis, we estimate 1999 operating income and EPS at $38.4 million and $0.76, respectively, on revenue of $219.3 million. For 2000, we are projecting operating income and EPS of $44.2 million and $0.84 on revenue of $252 million. We expect this revenue and earnings growth rate to accelerate in 2001 as DVD, set-top box and especially codec revenue continue their solid growth and as VCD sales stabilize in the $40-50 million range. From a balance sheet perspective, Semiconductor should be in a strong position to drive this growth after the spinout, with roughly $250 million in cash (after taxes). Based primarily on a relative valuation analysis of comparable companies in the digital video semiconductor space (using both P/E and market cap/revenue metrics), we estimate the value of the Semiconductor unit at roughly $21-22 per share or $1 billion. This implies a CUBE stock price today of roughly $54, based on last night's HLIT closing price. Harmonic and DiviCom--Looks Like A Match Made in Heaven There is tremendous synergy in the Harmonic-DiviCom combination, in our view, and we expect the combined company to emerge as the category killer in supplying next-generation digital video and broadband communications systems to cable, satellite and terrestrial broadcast networks. A fast-growing supplier of fiber optic transport systems to cable TV operators, Harmonic has little product or customer overlap with DiviCom. Accordingly, the cross-selling opportunities look outstanding to us right off the bat, especially in the cable TV and satellite markets. In particular, both companies are attracted by the ability to offer a total package to cable operators--everything from head-end gear to fiber optic transport to neighborhood nodes--all based on open solutions. We expect the companies, by joining forces, to drive the adoption of standards-based technology in the digital video and broadband markets--a trend that most operators appear to be recognizing as the way of the future--to the detriment of proprietary players such as General Instrument (GIC: $50 1/2) Scientific-Atlanta (SFA: $52 1/4). On a pro forma combined basis, Harmonic-Divicom had revenue and operating income of $255 million and $36 million, respectively, for the first nine months of 1999. Excluding one-time charges and amortization of goodwill, the transaction is expected to be accretive in 2000. Given the strength of the individual companies and the likely synergies that the merger should create, we expect the combined company could achieve a growth rate north of 50% in 2000.