http://www.tvtechnology.com/features/news/n_harris_buys_leitch.shtml
Harris Buys Leitch
Combined companies target $2.4B market
by Tom Butts
MELBOURNE, FLA & TORONTO
Harris Corp. announced late last month that it plans to purchase
broadcast technology provider Leitch Technology Corp. in a deal worth
approximately $450 million. Harris says it expects the transaction will
be completed by November.
Harris will pay $14 per share, but doesn't expect the acquisition to
affect its 2006 earnings. In fiscal year 2007, the transaction is
expected to increase earnings by 6 cents per share. Toronto-based Leitch
saw its stock rise over 25 percent after the announcement. Harris stock,
which has gained 60 percent over the past year, edged up slightly as well.
END TO END
The acquisition represents one of the biggest mergers to date in the
broadcast technology industry as manufacturers attempt to consolidate to
provide "end to end" solutions in the DTV transition. Harris is
traditionally known as a provider of broadcast transmission and
automation products, although the company has recently increased its
focus on asset management and other software-based technology. Leitch is
famous for its master control, server and signal processing and
distribution products, but has also been branching out. Over the past
year-and-a-half, Leitch has purchased two companies that complement its
product line: Pottstown, Penn.-based test and measurement company
Videotek in 2004, and fellow Canadian graphics provider Inscriber Corp.
earlier this year. Harris acquired broadcast automation provider Encoda
for $340 million a year ago.
The Leitch acquisition makes Harris the broadcast behemoth, expanding
its market potential from serving a $500 million TV sector to a $2.4
billion market, with 3-4 percent annual growth, according to Brian R.
Roub, chief financial officer for Harris Corp. Leitch has approximately
850 employees worldwide and serves more than 3,000 customers in 100
countries. Harris' broadcast division, which has announced recent
layoffs and is moving production from the U.K. to establish a single
transmitter manufacturing plant in Quincy, Ill., has about 1,700
employees worldwide. Broadcast revenues in its most recent quarter were
$114 million, up from $89.1 million for the same quarter a year ago.
The deal comes on the heels of another large industry acquisition,
Avid's recently completed purchase of Pinnacle Systems. In contrast to
that transaction, which represented the takeover of one video-editing
powerhouse over a competitor, the Harris-Leitch merger will result in a
combined company with complementary product lines.
"We don't have any product offerings that overlap with Leitch," said
Jeremy C. Wensinger, president of Harris Broadcast Communications
Division. "We believe this is a very exciting merger between two
complementary companies," added Roub.
Wensinger said that Leitch's management team, headed by former Grass
Valley chief Tim Thorsteinson, was also an important factor in the deal.
Since coming onboard as president and CEO of the company 18 months ago,
Thorsteinson has slashed costs and increased the company's focus on new
products and acquisitions. The result has sweetened Leitch's bottom
line: pro forma operating income excluding restructuring charges
increased from a loss of US$14 million in fiscal 2004 to a profit of
US$7 million in fiscal 2005, which ended April 30.
"What Tim and his team have been able to do is demonstrate that the
products that they have designed and developed are paying off,"
Wensinger said. "They're seeing good revenue growth, they're seeing good
margin expansion and this team is being rewarded in the last year; you
saw with their stock price moving, that the market is seeing that."
Thorsteinson, for his part, said that Leitch's size has prevented it
from effectively competing in the broadcast marketplace.
"I've believed for a while, and have been pretty public about the fact
that it's very difficult to be a $217 million global enterprise
attacking the worldwide broadcast market," he said. "Whether we rolled
up other companies or somebody acquired us was probably inevitable to
hit the operating model we're talking about and invest in the R&D and
service and support we have. Although we weren't looking for this to
happen, once we started talking, it became pretty clear that there's a
great strategic fit in the business and we thought it was a pretty good
time to do it."
OUTSIDE THE TRANSMISSION BOX
As the industry's largest broadcast transmission provider, Harris'
broadcast communications division has seen its revenues ebb and flow
since the DTV transition got underway approximately seven years ago.
Harris benefited greatly as broadcasters built out their digital
broadcasting transmission facilities to comply with FCC deadlines (and
expects to see increased business as the radio industry transitions to
digital). However, as the pace of digital transmitter purchases has
slowed, Harris Broadcast has been attempting to broaden its product
focus. Wensinger says such prevailing opinions about Harris' outlook
simplify the situation and that the digital transmitter business remains
healthy.
"In terms of full power and channel selection, we believe there's about
another 40 percent to go in the U.S. in terms of transmission,"
Wensinger said. "Even though [broadcasters] are transmitting digital,
they're not transmitting at the right power level or are at the final
channel selection."
Harris executives characterize the Leitch acquisition as a vote of
confidence that the worldwide digital media market will see a healthy
expansion for the foreseeable future, and that the larger company will
be well positioned to take advantage of increased efficiencies brought
about by digital technology that will expand beyond broadcasting and
into cable, satellite, telco and the Internet.
"Digital content and HD broadcasting together are changing the nature of
the global broadcast industry landscape," said Roub. "Broadcasters have
already made significant investments in DTV transmission capability. Now
they are making significant investments in the hardware and software
systems to manage and distribute their content and their HD signals
through a variety of delivery alternatives, including over-the-air,
cable, satellite and telephony. This will drive very attractive market
growth in the range of 10-12 percent, first in the U.S. and then in the
international markets."
MC MARKET GROWTH
Harris sees growth potential in the digitization of master control
facilities, which also made Leitch an attractive acquisition.
"The digital media and infrastructure products provided by Leitch
address large, fast growing markets," said Roub. "The underlying driver
for this market growth in the broadcast segment is the conversion to HD
master control and HD production studios by networks and broadcast
stations."
Roub pegs the average cost of an HD master control system at
approximately $1.3 million and about $3.3 million for a typical HD
production studio. With the addition of the Leitch product line, Harris
expects to be able to provide about 60 percent of the gear, or around
$2.7 million per typical installation.
"The current estimated penetration [in the U.S.], is only about 45
percent for HD master control and only about 10 percent for HD
production studios," he said. "There is clearly a lot of market growth
ahead of us as customers continue to move down the line of conversion."
Roub adds that the Leitch purchase not only expands its addressable
market, it increases Harris' revenue growth potential into adjacent
sectors. While Leitch's target market has been the traditional
broadcaster, Harris' most profitable customer is the U.S. government,
and Harris Corp. CEO Howard Lance expects the company will quickly
integrate and market the Leitch product line to this market as well as
growing corporate and education sectors.
"I see opportunities for Harris to introduce Leitch products as part of
the broader digital media solutions into our government base of
customers, as well," Lance said. "Harris has some niches in other
businesses--the enterprise space outside of broadcast--so I see both of
those offering upside opportunities for the company. If you think today
about the volume of digital media that the U.S. government is dealing
with in DoD and Homeland Security, for example, it's becoming quite
significant."
Because of the lack of redundant products, Harris Corp. executives said
they don't expect many layoffs.
"There are some public-company related costs and opportunities in the
general administrative area for taking advantage of our larger scale,"
said Lance. "There's not a large amount of overlap so we don't expect a
large amount of redundancies to result."
As for the Leitch name, Lance said that while Harris expects to see some
"co-branding," for the time being, the Leitch brand "has value and we
will look very closely at that before making any changes."
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