Arris Executive Confident About Cable's Voice Future

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Following a series of fits, starts and deal-term alterations that began in August of last year, Antec Corp. has finally assumed control of Arris Interactive LLC, a broadband-equipment venture it formed with Nortel Networks Corp. in 1995.

The closing of the deal also changes Antec's corporate identity: The new company is now known as Arris Group Inc. and began trading on the NASDAQ stock exchange last Monday (Aug. 6) under the symbol "ARRS."

The final agreement gave existing Antec shareholders one share of Arris for each share of Antec they owned as of Aug. 3, the day the deal was announced. Those Antec shareholders also own 50.8 percent of Arris, while Nortel — the company's largest shareholder — retains a 49.2-percent interest.

Liberty Media Group Inc., which at one time was the joint venture's largest shareholder with a 20-percent stake, now owns about 10 percent of the new Arris.

"We essentially paid for the Nortel interest in the Arris joint venture with a stock issuance," said Arris president and CEO Bob Stanzione.

Before the agreement, Antec owned 18.75 percent of the Arris joint venture and Nortel owned 81.25 percent.

The deal terms at closing were different than the original pact struck between Antec and Nortel last August. The initial agreement called for Nortel to retain a lower, 46.5-percent stake, plus $325 million in cash.

However, a capital-spending slowdown hit Antec (and just about every other company in the sector), prompting the two parties to go back to the negotiating table. Under the new terms, Arris issued 37 million new shares, valued at about $390 million.

"Immediately after [the original deal was announced], the bottom fell out of the telecom and banking markets and we had to go back and renegotiate the deal because valuations had shifted downward," Stanzione said. Instead, "we did the all-stock deal," he said.

In addition to the financial alterations, the new terms give Nortel some additional influence via two seats on the Arris board.

At the same time, the deal changes Arris' relationship with Nortel.

"It'll be an arm's-length relationship, from a marketplace point-of-view," Stanzione said. "We're not controlled or constrained by Nortel, but by having them as our largest shareholder, we plan to work closely with them on joint bids. However, neither company is exclusively attached to the other."

THE NEW ARRIS

Today, Arris Group operates everything under the old Arris Interactive banner, as well as Antec's existing businesses, and is comprised of three divisions: broadband, network technologies and Telewire supply.

Arris' broadband unit makes and sells products from the previous joint venture, including its Cornerstone cable-telephony gear, cable modems and cable-modem termination systems, as well as a new breed of Internet protocol-based equipment under the Touchstone brand. That division's largest cable MSO customers include AT&T Broadband, Cox Communications Inc. and Insight Communications Co.

The network-technologies area includes Antec's transmission, fiber-management and outside plant infrastructure business; Telewire supply comprises Antec's former supply-chain service and management arm.

Stanzione said the new arrangement would unlock Arris' value, which had been hidden in Nortel and Antec statements. Finishing the deal also removes what has been considered a distraction.

"We can now focus on our business and other strategic initiatives," Stanzione said.

A BOTTOM SEEN

Although the economic climate remains murky at best, Stanzione said Arris is nearing the bottom of the spending downturn. But he said this latest string is still out of the ordinary.

"I've been in the telecom industry for 32 years, and I understand the history of the industry," he said. "I don't think we've ever seen a drop in business like we've seen this year worldwide."

Although cable-telephony equipment is not widely deployed, which opens up room for improvement, "I don't see a dramatic turnaround coming either," Stanzione added.

He said today's business cycle is like a "bathtub."

"We go down and ride the bottom for a while and then come back up," Stanzione said. Meanwhile, AT&T Broadband is using up its inventory — a promising sign after scaled-back AT&T purchasing stopped Antec cold last November.

The picture will become clearer in September, when MSOs begin budget discussions for 2002, Stanzione said. Additional telephony deployments will likely fuel Arris' growth.

"Operators that aren't doing cable telephony today are planning to do it," Stanzione said.

Most of those plans involve voice over Internet protocol (VoIP), which most estimates predict won't hit primetime until late 2002 at the very earliest. Arris has conducted VoIP trials with Charter Communications Inc. in St. Louis, Mo. and Adelphia Communications Corp. in Buffalo, N.Y.

The success of VoIP will rely on much more than the technology that will run it. Other considerations include staffing and interconnection agreements, as well as back-office functions, which can take about six to 12 months to set up.

"You don't just decide tonight to go into the phone business and start tomorrow," Stanzione said.

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