San Diego-Based VideoCipher Is Part of Leveraged Buyout Deal : Acquisition: Forstmann Little’s $1.6-billion buyout of General Instrument will include the electronics firm.

Leveraged buyout specialist Forstmann Little & Co. has agreed to acquire General Instrument, a cable television equipment manufacturer that owns San Diego-based VideoCipher, in a deal valued at $1.6 billion, the two companies announced Monday.

The deal 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.

General Instrument’s VideoCipher subsidiary makes satellite/cable TV encoders and decoders that are designed to keep owners of satellite dishes from receiving programming without paying for it. VideoCipher’s technology now dominates the satellite TV industry, and dish owners must buy VideoCipher “descramblers” in order to clearly receive signals from more than 60 programmers, including HBO, Turner Broadcasting, Showtime, ESPN and others.

VideoCipher accounted for about $250 million of General Instrument’s $3.7 billion revenue during the fiscal year ended Feb. 28, sources said. Of VideoCipher’s 2,000 employees, about 450 work at the unit’s San Diego facilities in Sorrento Mesa. General Instrument, which also makes cable television electronics and coaxial cable systems, has a payroll of 15,000.

In a meeting of employees Monday afternoon, VideoCipher General Manager J. Lawrence Dunham said that the tender offer will not affect jobs or operations.

In addition to General Instrument’s cable/satellite TV technology, Forstmann Little may have been attracted by VideoCipher’s all-digital high definition TV (HDTV) technology, one of seven under consideration by a Federal Communications Commission review committee for possible standardization.

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 a 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 a better offer would materialize.

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 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.

Since the decline in the junk bond market, leveraged buyouts have slumped. Only 11 deals were announced in the first five months of the year, contrasted with 33 from January to May of 1989, according to W.T. Grimm & Co., a Schaumburg, Ill.-based consulting firm owned by Merrill Lynch & Co. However, the dollar volume increased slightly to $6.2 billion over the $5.5 billion in the same period last year, the company reported.

“We believe that this all-cash offer provides an excellent value for our shareholders,” said Frank G. Hickey, chairman and chief executive of General Instrument. “We look forward to the new opportunities that the association with Forstmann Little will provide for General Instrument.”

“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.”

Analyst Harry Rosenthal with Deutsche Bank Group in New York said Forstmann Little is betting on growth areas for General Instrument, including satellite projects in Japan and Great Britain, and cable ventures in Western Europe.

“They’re really paying for General Instrument’s domestic business . . . and they’re getting the new ventures for free,” he said.