Carlyle in Talks to Purchase CommScope: Could InterDigital Have Been a Better Choice?

 |  Includes: CARYK, CTV, IDCC
by: Stephen Castellano

Bloomberg reported this morning that the leveraged buyout firm Carlyle Group (OTC:CARYK) is in talks to purchase CommScope (CTV), a fiber-optic cable maker based in North Carolina, for $31.50 cash per share or about $3 billion. The deal values CTV at about 13.9x calendar 2011E consensus EPS and 7.7x EV/LTM EBITDA.

At Friday's close, CTV's market cap was about $2.2 billion, and it was trading at 10.2x 2011E consensus EPS and 6.1x EV/LTM EBITDA. As the table below illustrates, CTV was showing fairly decent Relative Value in the Technology sector, but ranked poorly on every other keep metric, including Operating Momentum, Analyst Revisions Momentum and Fundamental Quality.

Could Carlyle have made a better choice? Our preliminary analysis indicates yes.

(Click to enlarge)

InterDigital (NASDAQ:IDCC), a wireless technology company, looks like it would have been the much better acquisition. IDCC is trading at a discount to CTV, with a 2011E P/E of 10.1 and EV/LTM EBITDA of 3.5x. In addition, the company has virtually no debt and $486 million in cash. Backing out the net cash of $11/share, the stock is only trading at 6.4x 2011E EPS.

This is an absurdly low valuation for a stock that that holds a 5 out of 5 score on our key ranking factors. At a 13.9x 2011 PE, IDCC could fetch $41 per share; adjusting for its net cash position and using the same multiple, a valuation of $52 could be justified.

Obviously, more than a few minutes of analysis needs to be done, but the initial valuation parameters do look compelling.

(Click to enlarge)

Netezza's Compatriots -- Where Are They Today?

In a similar M&A screening exercise we conducted last month on September 20, we found five Technology sector stocks that were more attractive than Netezza (NZ), which International Business Machines (NYSE:IBM) announced it intended to purchase for $1.7 billion.

Since September 20, these five stocks (AVX Corp. (NYSE:AVX), Vishay Intertechnology (NYSE:VSH), Veeco Instruments (NASDAQ:VECO), Trina Solar (NYSE:TSL) and TriQuint Semiconductor (TQNT)) have appreciated an average of 8.75%, above the Nasdaq Composite return of 5.24%, and ranging -1.35% to 22.76%.

(Click to enlarge)

Disclosure: No positions