Harris Corporation has completed the sale of its Broadcast Communications Division (Harris BCD) to The Gores Group, a Los Angeles based private equity firm.
Contractual details of the Asset Sale Agreement between Harris and The Gores Group can be viewed here.
The completion of the deal means that Harris Corp is now officially out of the broadcast business, after 50+ year run as one of the broadcast industry’s most significant technology vendors. However, it appears that, for now at least, BCD will continue to be called Harris Broadcast.
Harris Morris, CEO of Harris Broadcast said “This is an exciting new chapter for Harris Broadcast, our employees and our customers. The Gores Group is an ideal fit to help us move the business forward and help drive innovation, streamline operations and improve customer service. They will also provide us additional resources such as a flexible capital base and introduce new talent to the Company.”
Carl Vogel, a veteran of the cable television and satellite industry, is a senior advisor to The Gores Group and will be a member of the Gores team providing advice and strategic guidance to the Company.
Ryan Wald, Managing Director of The Gores Group added, “We anticipate great things from Harris Broadcast. The Company has proven technology, great products and an outstanding team. With our equity capital and guidance we are confident that Harris Broadcast will transition to a strong independent company that will continue to develop and deliver market leading technology and service to its customers.”
The headline valuation of the deal was $225m, comprised of “$160m in cash, a $15m subordinated promissory note and an earnout of up to $50m based on future performance.” According to a Harris 8-K filing with the SEC, the terms of the earnout state that in each of the four calendar years from 2013 through 2016, Harris Corporation will receive a contingent payment (in cash) of twenty percent of the revenue of Harris BCD that is in excess of a specified target revenue amount. The target revenue amount required to trigger the contingency payment to Harris Corporation was not specified, so it is difficult to judge how likely it is that the payment will be triggered. This contingent payment amount is subject to an annual cap of $25m in each calendar year (2013 – 2016).
The price paid by Gores for BCD is lower than what Harris executives previously indicated they hoped to achieve. As a result, Harris Corp recently recorded a non-cash impairment charge of $98m relating to the sale of BCD. This is fourth time the company has written down the value of BCD during the sale process.
Following the most recent write-down of BCD’s book value, the company was contacted by SEC staff regarding the timing of the impairment charges relating to BCD. According to a filing with securities regulators, Harris provided the SEC with the following explanation:
“As of our June 29, 2012 year-end, we wrote down the carrying value of Broadcast Communications (“BCD”) to $461 million, which represented the lower of carrying value ($461 million) or estimated fair value of $490 million less estimated costs to sell of $26.5 million (or $463.5 million). With the assistance of a third-party valuation consultant, we estimated the fair value at that time to be $490 million based on discounted cash flow analysis and an analysis of sale transactions and public company market multiples for companies in markets similar to BCD. This analysis yielded estimated fair values ranging from $487 to $496 million, and included assumptions that reflected expected conditions in the markets BCD operates in. Our analysis was corroborated by a valuation summary prepared by the investment banker we engaged to assist with the sale of BCD and preliminary indications of value from potential purchasers of BCD which we received in early August 2012. Accordingly, we believe the net assets of BCD were appropriately valued at June 29, 2012.
“Unexpected changes in facts and circumstances caused us to conclude impairment indicators were present relative to BCD at the conclusion of our first fiscal quarter ended September 28, 2012. As a result of weaker than expected market conditions and general uncertainty in the market surrounding the BCD sale process, BCD unexpectedly reported lower than forecasted revenue, operating income and cash flows for the first quarter of fiscal 2013. BCD’s lower first quarter results and a lower confidence level in BCD’s ability to meet future financial forecasts resulted in lower preliminary bids from interested parties received during the last week of October ranging from $175 to $310 million. Further, we updated our discounted cash flow analysis as of September 28, 2012 by adjusting our assumptions of expected revenues, operating income and cash flows. Specifically, we reduced our revenue projections, increased projected working capital requirements and applied higher discount rates to reflect greater uncertainty surrounding BCD’s current and future expected financial results. As a result of the lower preliminary bids, our updated discounted cash flow analysis and a revised valuation summary prepared by our investment banker, we reduced the carrying value of BCD as of September 28, 2012 to $287.2 million (estimated fair value of $300 million, less estimated selling costs of $12.8 million), resulting in a non-cash impairment charge of $216.5 million.”
Recent Performance of Harris BCD
According to a recent 10-Q filing with the SEC, Harris said its discontinued operations, the vast majority of which relate to BCD performed as follows:
Looking to the Future of Harris Broadcast
Now under new ownership, Harris Broadcast remains one of the largest vendors in the broadcast technology space. The completion of deal means the company can now put behind it the uncertainty that has surrounded it since Harris Corp announced its intention to divest the business. As an independent company Harris Broadcast can now focus entirely on its core business and execute its strategy for growth and profitability. It will be interesting to watch the actions the company takes between now and the 2013 NAB Show, which will be the first major public appearance of the new company.
Harris Corp Press Release: Harris Corporation Completes Sale of its Broadcast Communications Business to The Gores Group
Gores Group Press Release: The Gores Group Completes Acquisition of Harris Broadcast Communications
Harris Corp 10-Q Filing for the Quarterly Period Ended December 28, 2012
© Devoncroft Partners. All Rights Reserved.