General Instrument Accepts $1.6-Billion Offer : Buyouts: Forstmann Little will use its own funds and bank loans rather than junk bonds to buy the cable-TV equipment maker.
Leveraged buyout specialist Forstmann Little & Co. has agreed to acquire General Instrument, a cable television equipment manufacturer, in a deal valued at $1.6 billion, the two companies announced Monday.
The transaction is not the largest leveraged buyout announced so far this year--that honor belongs to the proposed $4.4-billion employee buyout of UAL Corp., parent of United Airlines. But it comes at a time when merger activity in general and leveraged buyouts in particular have slowed, largely because of the decline in prices of the high-risk junk bonds that financed many offers.
New York-based Forstmann Little, however, is using its own funds and bank loans rather than junk bonds to finance this deal. In a leveraged buyout, investors typically borrow money to buy a company and then pay off the debt with cash generated by the business or by selling pieces of the company.
Some analysts said Forstmann Little is paying a fairly modest price for New York-based General Instrument, which has enjoyed good earnings and revenue growth in recent years. And yet the price represents a premium over General Instrument’s erratic stock price, which closed Friday at $36.25 per share on the New York Stock Exchange.
“It’s probably not a bad deal all around,” said Jay D. Samstag, an analyst with the Duff & Phelps investment firm in Chicago.
General Instrument’s stock closed Monday at $45.125, slightly above the price offered by Forstmann Little. But analysts doubted that a better offer would materialize.
General Instrument makes cable television electronics, coaxial cable and satellite scrambling systems. About 2,500 of its 15,000 employees worldwide are based in California at its VideoCipher subsidiary in San Diego and its Dalmo Victor unit in Belmont.
Forstmann Little has agreed to pay $44.50 a share in cash for each of General Instrument’s approximately 32 million shares, including common shares outstanding and debt that is convertible into common stock, for a total of about $1.4 billion. The rest of the transaction’s value is existing debt that Forstmann Little will assume or refinance.
Forstmann Little said it will launch a tender offer for a majority of the stock within five days. The transaction is fully financed through a combination of Forstmann Little’s existing equity funds and bank financing provided by Manufacturers Hanover Bank in New York and Continental Bank in Chicago.
General Instrument’s management is not yet participating in the transaction but might later, Forstmann Little spokesman John Scanlon said. Current management is expected to remain with the company, he said.
Under the merger agreement, Forstmann Little will be paid $33 million if General Instrument accepts a higher merger offer.
“Because of Forstmann Little’s ability to employ a uniquely conservative capital structure, all of the companies it has previously acquired have been able to continue to invest in their future,” said Theodore J. Forstmann, a general partner of Forstmann Little and an outspoken critic of junk bond financing. “Accordingly, we expect that after the acquisition, General Instrument Corp. will continue its position as a market leader and will be able to maintain its technological superiority.”
DECLINE IN DEAL MAKING
Total number and dollar volume of merger deals have declined so far this year compared to last year. These are deals announced, rather than completed, during the time period shown. Figures include mergers, acquisitions of public and private companies, divestitures and purchases of foreign companies by U.S. investors, announced from January through May 31. However, as shown in the “Going Private” figures (predominantly leveraged buyouts), the dollar volume of LBOs have risen despite the smaller number of deals.
TOTAL TRANSACTIONS
NUMBER OF DEALS VALUE Jan.-May, 1990 991 $47 billion Jan.-May, 1989 1,069 $87.3 billion
GOING PRIVATE
NUMBER OF DEALS VALUE Jan.-May, 1990 11 $6.2 billion Jan.-May, 1989 33 $5.5 billion
Source: W.T. Grimm & Co.
