Mitel Networks' (MITL) CEO Rich McBee on Definitive Agreement to Acquire Polycom - Conference Call Transcript

| About: Mitel Networks (MITL)

Mitel Networks Corporation (NASDAQ:MITL)

Definitive Agreement to Acquire Polycom Conference Call

April 15, 2016 08:30 AM ET

Executives

Michael McCarthy - VP of IR

Rich McBee - President and CEO of Mitel

Peter Leav - President and CEO of Polycom

Steve Spooner - CFO

Analysts

Sachin Shah - Albert Fried and Company

Barry McCarver - Stephens, Inc.

Dmitry Netis - William Blair

Tavis McCourt - Raymond James

Richard Tse - Cormark Securities

Paul Treiber - RBC Capital Market

Jess Lubert - Wells Fargo Securities

Todd Coupland - CIBC

Jonathan Kees - Summit Research

Operator

Good day, ladies and gentlemen, and welcome to the Mitel to acquire Polycom Conference Call. At this time all participant lines are in a listen-only mode to reduce background noise. But later we will be conducting a question-and-answer session. Instructions will follow at that time. [Operator Instructions] As a reminder, today’s conference call is being recorded.

I would now like to introduce your first speaker for today Michael McCarthy, Vice President of Investor Relations. You have the floor, sir.

Michael McCarthy

Thank you, Andrew and good morning everybody. It’s my pleasure to welcome you to Mitel’s discussion of our announcing a definitive agreement to acquire Polycom. Very early this morning, the company issued a press release relating to this transaction, a copy of the release and the related supplementary slides are available on our website at mitel.com.

On the call this morning to provide some brief prepared remarks are Rich McBee, Mitel’s CEO; Peter Leav, Polycom’s CEO; and Mitel’s CFO, Steve Spooner. Following these remarks we will open the lines for Q&A.

Before turning the call over to Rich, I’d like to remind those of you who joining us on the live call and those who maybe also using the webcast, that some of the statements made during this call are forward-looking statements or forward-looking information, within the meaning of applicable U.S. and Canadian Securities Laws. There is no guarantee that the expected events and expected results will actually occur. Such statements reflect the current views of management and are subject to a number of risks and uncertainties including but not limited to risks relating to the transaction. Please refer to Mitel’s press release and Mitel and Polycom’s filing with the SEC for more information about assumptions and risks relating to such forward-looking statements.

In addition these communications are not intended to or do not constitute an offer to sell or the solicitation of any offer to buy any securities or the solicitation of any vote or approval in any jurisdiction. In connection with the transaction Mitel will file with the SEC a registration statement on Form S4 that is expected to include a joint proxy statement of Mitel and Polycom that also constitutes a prospectus of Mitel.

Investors and security holders of Mitel and Polycom are urged to read such document carefully when they become available because they will contain important information about Mitel, Polycom, the transaction and other related matters.

With that, I would now like to turn the call over to Mitel’s CEO Rich McBee. Rich?

Rich McBee

Thanks, Mike, and good morning everyone. Peter, Steve and I appreciate you joining us on such short notice. We are very excited to talk to you today about the transaction we just announced.

Earlier this morning Mitel and Polycom entered into a definitive agreement in which Mitel will acquire Polycom in a stock and cash transaction valued at $1.96 billion, which equates to a 22% premium on Polycom shares as of April 5th. The deal is expected to be accretive to earnings in calendar year 2017.

I have talked frequently about the fact that we are in an unprecedented period of technology, industry and market convergence. I have also talked openly about Mitel’s intention and strategy to lead consolidation. This proposed acquisition of Polycom, which we anticipate completing in the third quarter is a major step on our journey as we continue to transform the company and the industry.

We first approached to Polycom in July or about 10 months ago and have been engaged in negotiations for some time. The nature of our discussions from the onset was to explore the potential strategic and shareholder value that we felt combining these two outstanding companies together could create. This morning’s announcement is confirmation of our original thesis that bringing our two companies together creates a compelling opportunity to unlock substantial market and shareholder value.

On a pro forma basis for 2015 the combined company would have generated roughly $2.5 billion in revenues and $350 million in EBITDA. Including estimated synergy pro forma EBITDA exceeds over $500 million that is more than double the expectation for Mitel today as a standalone company in 2016.

Once the transaction is completed Mitel will also immediately deleverage our net debt ratio from our current level of 3.8 to 2.1. Geographically the new Mitel becomes much better balanced company and better positioned to manage the economic and currency volatility. In the Asia Pacific region for example Mitel standalone does approximately $50 million on an annual basis this will jump to over $360 million with Polycom based on a pro forma 2015.

We also expect there will be some excellent opportunities to achieve sale synergies and to cross sell into each company’s global installed base. Once closed Polycom investors will own about 60% of the company and will be offered two seats on our Board of Director, Sir Terry Matthew will remain Chairman of the Board. You will get into further details around the financial structure in a moment, but I will simply summarize by saying that once the transaction has been completed Mitel will once again have double the size of our company and we will have significantly strengthen our financial position with the technology, scale and operating leverage needed to strategically expand in an actively evolving market.

While the financial benefits for both companies are clearly compelling. The underlying strategic rationale is equally compelling. Once the transaction is closed Mitel will be ideally positioned to lead their competitive landscape with an impressive list of leading global market positions including number one in business cloud communication, number one in PBX extensions in Europe, number three in the Americas and number four globally.

Number one, in conference phones, number one in open SIP sets, number two in video conferencing, number two in installed audio and installed customer base more than 82% of the Fortune 500 company, deep product integration with Microsoft Solutions, mobile deployments in 47 of the world’s top 50 economies and a combined portfolio of more than 2,100 patents and more than 500 patents pending.

We are creating a highly competitive company with truly global scale, a strong capital structure and upon closing will count among its most strategic relationship one of the largest and broadest reaching companies in our industry today. In today’s release I announced that I’m continue on as Mitel’s CEO, and Steve Spooner will continue on as the company’s CFO. I’m honored for the opportunity, but I’m also very excited by the number of very experienced Polycom executives that will be joining our leadership team once our integration planning is complete and the deal closes.

I’m particularly excited that with an expanded global team of over 7,700 employees worldwide, we will be able to give customers of both companies access to some of the world’s best technology, design delivered by some of the best talent in our industry.

With respect to next steps, shareholder meetings are going to be held by both companies as we seek approval for the deal. We will set the date for these after we receive the necessary regulatory approval. Our integration team will lead by Steve we will immediately begin our integration planning efforts so that we can hit the ground running at the time of closing.

With this deal Mitel is executing against our long standing strategic plan of consolidating the market are bringing the best brand and the broadest solutions portfolio together. We believe as a result of this transaction our technology scale and reach along with the strong balance sheet will be a competitive asset. The Mitel team will also be strong with the addition of a well-seasoned Polycom team who knows how to deploy these assets effectively for customers we serve every day.

With that, I would like to now turn the call over to Peter Leav, President and CEO of Polycom to share his perspective on the transaction.

Peter Leav

Thank you, Rich. This is an important day for Polycom and we are excited to make this announcement with Mitel Networks. Two years ago Polycom rolled out a strategic framework designed to optimize operational performance and deliver improved operating margins. We put the customer first by designing and delivering differentiated products and solutions with their collaboration goals and input in mind. And we built the culture of one winning team with integrity as a foundation across the globe.

The team at Polycom has been dedicated to improving financial performance and driving profitability and leverage in our business model. To-date, we have improved our operating margin performance by almost 30% since the fourth quarter of 2013. Polycom has a compelling global brand, outstanding balance sheet, an extensive partner and customer ecosystem and a highly robust and innovative product portfolio.

The combination announced today has strong strategic rationale as it will create a next generation voice and video communications and collaboration solutions leader well positioned across the globe to address communications via the cloud and next generation mobile services. Mitel brings product strength in the enterprise audio telephony platforms, infrastructure, mobile software and services and cloud hosted communication services, which is complementary to Polycom’s strength in voice, video and content sharing in collaboration solutions.

At Polycom, we worked hard to establish the reputation for financial discipline, sound decision making and being good stewards of our capital. For our shareholders this announcement provides both compelling upfront value as well as the opportunity to participate in a future upside of the combined businesses.

With that, I will turn the call over to Steve Spooner, for additional details about today’s announcement. Steve?

Steve Spooner

Thank you, Peter. Good morning everyone. Rich and Peter gave a great high level overview of the compelling business reasons and the financial benefits of bringing Mitel and Polycom together. Let’s get to the details of our proposed deal and highlight several of the important timeline milestones so we can open the line for the Q&A part of the call.

The Board of Directors from both companies have unanimously approved the transaction, which we are driving to close likely in the third quarter of this year subject to the shareholder approval of both companies, certain regulatory reviews and other customary closing conditions. This will be a stock and cash transaction valued at approximately $1.96 billion. Mitel will offer to acquire all of the Polycom share where Polycom shareholders will be entitled to $3.12 in cash and 1.31 Mitel shares for each share of Polycom that they own. This amounts to total consideration of $13.58 per share of Polycom common stock. The transaction represents a 22% premium to Polycom’s shareholders based on Mitel’s and Polycom’s unaffected share prices as of April 5, 2016.

Upon closing, Polycom shareholders will hold approximately 60% of the company. Our Board of Directors will be expanded by two seats, which will be offered to existing Board members of Polycom. We will be funding the cash portion of this acquisition with a combination of cash on hand as well as by accessing the debt markets. Mitel has secured committed financing for $1.05 billion in new debt financing to replace the approximately $880 million of existing debt that’s in place of Mitel and Polycom as of December 31, 2015.

The total amount of equity issued will amount to approximately $1.5 billion and in addition we anticipate putting in place a new revolver of up to $100 million to provide additional liquidity on an as needed basis.

Now turning to some of the more important financial metrics, which will complement the very compelling strategic business rationale; Mitel and Polycom are both public companies with December fiscal year ends, we are covered by a number of financial analysts who publish models and estimates for 2016. Both companies have already reported results for the fourth quarter ended December 31, 2015 and have filed their 10-K reports with the SEC. Both companies will report their first quarter for the 2016 fiscal year for the period ended March 31 with Polycom reporting on April 20th, and Mitel reporting on May 5th.

An attractive feature of the new capital structure and scale of the combined business is the substantial decrease in Mitel’s debt leverage. On a calendar year ‘15 pro forma basis, Mitel’s current gross debt leverage of 4.4 times will be reduced to 3.0 times. And given the expected substantial cash reserves in the combined business, net leverage would improve from 3.8 times to 2.1 times. When one considers the attractive cost synergies, which I will comment on further, pro forma gross leverage would drop to two times and net leverage to 1.4 times.

In terms of revenue based on the most recently disclosed trailing 12 months combined revenue were approximately $2.5 billion. The combined spending by the companies is running at approximately $2 billion annually. We estimate that annualized cost synergies will be approximately $160 million and be fully realized by 2018. This is beyond the roughly $40 million in cost reduction actions initiated by Polycom in the fourth quarter of 2015. These synergies will be driven by leveraging the scale of the combined operations including its G&A, supply chain and R&D programs as well as eliminating discipline corporate overhead cost.

The cash cost to fully recognize these synergies is expected to total $165 million. On a pro forma basis for 2015 the combined company would have generated $350 million in EBITDA and over $500 million once the targeted synergies are achieved. Given the strong cash flow generation expected in the combined company are top priorities for capital allocation will be further paying down debt, setting the stage for the companies to consider share buybacks through further enhanced shareholder returns.

Depending upon the month of closing cash on hand is expected to be in the range of approximately $300 million. As Rich mentioned, we expect this combination to be accretive to calendar 2017 earnings.

While we are still early in the process of closing the March quarter we wanted to confirm our expectations that our Q1 results will be in line with our previous guidance which we provided on our February 25th call, during which to discuss our December quarter results. Based on the preliminary information available now, we are expecting Mitel’s revenues to come in within the range of $270 million to $280 million and adjusted EBITDA is expected to be in the range of 7.5% to 9.5%.

To summarize, the combination of Mitel and Polycom is compelling from both a strategic business rationale as well as from the financial perspective. With the combined R&D run rate exceeding $300 million, the new company will be well positioned to bring leading edge communications and collaboration solutions to our customers, channels and partners.

Our deal is expected to be accretive for Calendar 2017 based on our ability to swiftly integrate and capture the benefits of our global scale, strong cash flow profile and the opportunity to realize meaningful synergies. Combined with the significant deleveraging that is enabled with this combination, Mitel will emerge as an even stronger company with attractive opportunities to deliver compelling returns to a much broader and deeper base of shareholders.

We look forward to reporting completion of the proposed deal in the very near future and getting on with the work of expanding Mitel’s leadership position as the industry’s truly seamless communications and collaboration solutions provider.

With that, we will open up the call to your questions. Andrew, if you could please review the process for asking questions and open up the lines please.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question for today comes from the line of Sachin Shah from Albert Fried and Company. Your line is open.

Sachin Shah

Hi, good morning congratulations happy Friday. So the question that I want to ask is usual one is the fact that we have this treasury proposed rules I just want to make sure because there’ve been some acquisitions in the past where you guys have issued stock that this doesn’t fall into that bucket that there isn’t any treasury rules or proposed rules that we’ve seen so far that’s going to impact this transaction as it currently structured to 40:60.

Steve Spooner

Sure it’s Steve here. Yeah this transaction is not an inversion this is cross order M&A a real Canadian public company with its management headquarters based in Canada acquiring a U.S. corporation for shares and cash. It is the transaction would be subject to the inversion rules, but this is not an inversion this is just normal cross order M&A.

Sachin Shah

Okay. So you have no -- you’ve looked at those propose rules and it doesn’t apply that’s really what I’m trying to get it doesn’t apply to you guys as it currently is structured and you’ve looked at that as you’ve announced this deal today, just wanted to…

Steve Spooner

Yes we have reviewed all of the inversion rules and the recent changes and have consulted with our advisors and as I’ve said this is not an inversion this is cross order M&A and we will have parts of our operation where international operations are subject to U.S. taxation and we will have some other international operations will be subject to local and or Canadian taxation or repatriation. So it’s kind of a business as usual and this is not a tax driven transaction.

Sachin Shah

Perfect. And just one follow-up question on the regulatory approvals can you just maybe go over what countries are required aside from the U.S. and potentially Canada? Thank you.

Steve Spooner

Yeah we don’t anticipate any significant regulatory issues we’ve looked at some of the other countries where we thought there might be and don’t anticipate any at this time.

Sachin Shah

Great thank you again congratulations.

Steve Spooner

Great, thank you.

Operator

Thank you. Our next question comes from the line of Barry McCarver of Stephens Incorporate. Your line is open.

Barry McCarver

Hey, good morning guys and congratulations.

Steve Spooner

Good morning.

Barry McCarver

I guess first off could you talk about kind of what your thoughts are little more color around the long-term revenue synergies of coming together with Polycom?

Steve Spooner

Sure as you know we’ve been working on the two pillars of our growth of the cloud and the mobile business we see that there are opportunities to leverage Polycom’s video capabilities in both of those growth initiatives for us. So we’re very excited about that. They also have a very large footprint up in the large enterprise space. And so we think that that can help the product portfolios.

In addition to -- Polycom has just come out with a whole suite of new and innovative products in the marketplace. And they’ve got some products that are aimed at the low end hurdle rooms, which is Mitel’s sweet spot we’ve got a very large global network of dealers down in that space we think we can accelerate that.

So there’s a number of things that we think that can provide revenue synergies. And then also we have started our new incubator business where we’ve taken leading engineers from each one of the businesses, the three pillars that we have today and they are creating new products and services and we’re really excited to get the brain power of Polycom also to join that group and create new products and services that the market hasn’t seen today.

Barry McCarver

Great, that’s very helpful. And then Rich you’ve talked about M&A and the need for consolidation in the industry and I think you’ve always been very active at looking at deals this is unique and it is dilutive I’m sorry, it is, it does lower leverage for Mitel, but just in terms of your appetite this is a pretty good size deal it’s going to take some time to integrate does this take you out of the market for a while and looking at other deals you still expect to remain active this year?

Rich McBee

Well there always been a little technology tuck-ins and stuff this is a really key deal for us because you know if you think about the company’s vision of seamless communications and collaboration we have the communication piece of that taking care very well with our mobile capability and our premise based capability and our cloud capability. This really ties in the last piece of that which is the collaboration piece with a world leader. So we’re very excited about that obviously we need to get this one done and be delivering the results. So deals take a long time this one has been on our funnel believe it or not for three years. So we’ll continue to work the funnel, but the reality is our 100% focus is going to be on integrating the company and making the best out of these two really great assets.

Barry McCarver

That’s very helpful, Rich. And then just lastly if I can, with today’s announcement in the press release you did adjust guidance for 1Q I think it is -- it looks like it’s still within the range of your initial revenue and even our guidance for the quarter, but it did lowered a little bit below consensus any particular segment or any reason for that change that we can think about?

Steve Spooner

Barry it’s Steve, no we were pleased that the results came in, in line with our guidance. Yes it is a bit below consensus, but very much in line with our internal operating plans. We’ll give more color on Q1 on our call on May 5th we really want to focus on the transaction today, but overall we’re very pleased with how we are executing the business.

Barry McCarver

Okay, thanks a lot guys.

Steve Spooner

Thanks, Barry.

Operator

Thank you. Our next question comes from the line of Dmitry Netis from William Blair. Your line is open.

Dmitry Netis

Yes, great. Thanks gentlemen and my congrats as well on signing this agreement.

Rich McBee

Thank you.

Dmitry Netis

So I just want to follow-up actually to Barry’s question and this is more kind of on the revenue growth projection side, I sort of guess Rich the different areas where you think you can leverage both product portfolios for both companies, but as you think about the future growth of its revenue base line as you come out of 2011 pro forma of $2.5 billion what are your thoughts on a kind of overall company growth maybe you’re not ready to communicate the target just yet, but if you could just walk us through your thought process qualitatively on the telephony side of the market and how you’re thinking about premise versus cloud mix CAGRs how that grows over the next five years potentially?

And then hope you incorporate video conferencing what are you assuming what’s your assumptions there on the growth side as well? And then whether there is any revenue dis-synergies that you anticipate from this transaction as well maybe in some areas of the business?

Rich McBee

Well a lot of that we’re going to come out with a new model for the combined company when we close the deal. We’ll be in the integration process for the next couple of months as we work through the process we’ve obviously the bottom-line is we’re not going to give forward numbers today. But we are very excited about the opportunities that we see we will keep the Polycom brand it’s a great brand, it’s very well recognized around the world. And it will operate as a division within our company.

What we’ll really be doing is bringing the leadership teams together exploring the revenue synergy opportunities. We have to act as separate companies until we aren’t any more so we have to be very careful about that and make sure that the teams are doing the appropriate integration. We can plan, but we can’t execute anything until we actually bring them together.

And so as like I described earlier we think that there is great opportunity in the cloud, we think that there is great cross selling opportunities for the businesses. We think that having a critical mass now in Asia Pacific will be very good for our business. We think that continue to build on our distribution partners that Polycom has a fantastic set of distribution partners. So we think that there are several opportunities and we will come forward with new model once we are finished with the integration planning which includes the deal.

Dmitry Netis

I appreciate it. Sorry to kind of maybe preempt that, but I get it. You won’t provide any targets. I just thought maybe you can qualitatively describe each markets and how they’ve grown. But that's okay. Can you maybe address also the dis-synergies question and whether you anticipating any dis-synergies when you join the forces together?

Steve Spooner

It’s Steve here. We found a lot of work on kind of go to market, channel reaction, customer reaction, customer concentration, channel concentration and we kind of went in with a view as whether we thought it would be significant revenue synergies. Our analyses suggest that [indiscernible] will be quite minimal and we think that the upside opportunities frankly in bringing the Polycom products into the Mitel 60 million user base, the Mitel products to be able to bring a full end-to-end communications and collaboration solutions that to the Polycom customer base and channels. We think certainly out way any risk which would be at the top-line.

Dmitry Netis

Okay. Thank you very much. Good luck with it.

Steve Spooner

Okay, thank you.

Operator

Thank you. Our next question comes from the line of Tavis McCourt from Raymond James. Your line is open.

Tavis McCourt

Hey, guys. Thanks for taking my questions. I’ve got a couple of them. First from a financial perspective Polycom had a bit of its cash that was offshore. Is that still trapped in essence based on a legal structure or will that be freely usable for whatever purpose? Another one is, in terms of the synergy targets, so one of the interesting things about this deal it doesn’t look at a lot really if any product overlaps, right? So it wouldn’t seem obvious that there is a lot of research and development synergy. So, is this mostly in distribution or maybe talk through where the cost synergies come from?

And then a follow-up to the last question specifically on Polycom and its relationship with Microsoft, I want to see if that was flushed out with Microsoft do you see any reason to believe that the relationship there would be impacted by this deal? Thanks.

Steve Spooner

Thanks. So it’s Steve, I’ll take the first two and then I’ll hand it back to Rich on the third question. So from an offshore cash protecting yes there will continue to be cash built up in the just given the very profitable cash generating nature of the Polycom’s operations offshore, that does not change in this transaction again this is not a tax driven transaction. So we have factored that into our cash flow models and the like as we looked as we’ve modeled to combined business going forward. So that really is business as usual.

From a synergy perspective you are right, there is not significant overlap in product portfolio however both companies build conference phones, both companies build desktop devices so that there is... and we frankly in our costs of goods sold OEM, video products from third party. So there will be some level of synergy there, but you are right unbalance. We expect the majority of the synergies to come from the SG&A and supply chain. And Rich maybe I’ll turn it back to you for...

Rich McBee

Obviously we could talk with Microsoft directly as the deal is going on. But we think that Mitel is always been an open platform company. We have connectors into our products for Skype for Business today. We think that we have some unique technologies that the partnership of Polycom and Microsoft can actually be expanded. And so as a sidebar we weren’t necessarily talking to Polycom. But we are always working with a big industry partners on what we can do together in a cooptation kind of format.

Now that this deal has been announced publicly now we can start to talk about some of the things that we can do with the combined technologies that we have to hopefully expand that partnership and have greater coverage and services for our customers. And Peter if you have any comments on that, I think that might be good time for you to also weigh in.

Peter Leav

Thanks, Rich. I think that’s a fair and on track overview and representative of the mindset and the approach from both companies as we have been very partner centric both Mitel and Polycom and very open in approach and I think which you outlined holds true. So no additional color on that other than to say the relationship is certainly been substantive and we’ll continue to approach it that way with Skype for Business, Office 365 as many of you know we have over 40 solutions today that work seamlessly in an integrated fashion in a Microsoft environment. So as Rich said I think there maybe opportunities to expand that considering the broaden portfolio that the two entities will bring together.

Tavis McCourt

Great. And just a follow up for Steve. So based on the answer to your question should we expect the tax rate on the Polycom profit post this deal to be similar to what the company has reported in the past or is there any tax benefit?

Steve Spooner

No, I think the conservative approach would be to model the existing rates that Polycom has previously guided on.

Tavis McCourt

Okay. So the synergy estimate that you are giving is all, it’s all operating synergies it’s not tax synergies?

Steve Spooner

Correct. Absolutely.

Tavis McCourt

Okay, thanks very much.

Steve Spooner

Thank you.

Operator

Thank you. Our next question comes from the line of Richard Tse from Cormark Securities. Your line is open.

Richard Tse

Yes, curious to see how easy will it be to integrate Polycom video products with the Mitel’s existing set of products here?

Rich McBee

So I think that our architecture has always been open. And so not to over simplify, but we are capable of plugging in a lot of solutions today. I think that as we integrate their solution deeper into our product set, we will be able to expand the capabilities other than have more than just the plugging capability. So we look forward to getting the engineering teams together and I’m sure that they are going to innovate, that’s what they do. So like I said today we have other plug-in video solutions so we think it will be relatively easy.

Richard Tse

And on the leverage ratio, can you maybe give me a background on how I guess rationale for coming out with a leverage ratio it seems like you have the capacity it just taken one more debt here with the transaction. But are you trying to sort of give yourself a room to do more acquisitions in the near-term?

Steve Spooner

Yeah. I think. Richard, we have talked before about -- we kind of like a net debt leverage ratio kind of sub 3, that’s a kind of zip code that we like to operate in. This is a large transformative deal with significant integration and opportunity to drive significant synergies. But given that the size and scale of the integration effort we thought it’s prudent to not lever up the balance sheet initially and to your point with what we expect to be very significant cash flow generation, we think following up on Rich’s comment earlier we are going to focus on getting this deal first. But it will position the company to potentially look at other deals in future.

Richard Tse

And just sort of following up on that question. So this transaction signaling that you are sort of moving back to the consolidation track and kind of away from the bigger technology type deals as it did with Mavenir.

Steve Spooner

Yeah. Well, I think that Mavenir was a growth asset and a very specific piece of the puzzle that we needed and that gives us the ability to have the mobile enterprise. Everything from this point forward we’ve got the some big collaboration engine now. We’ve got the mobile engine we’ve got a sound footprint, global footprint in premise and cloud solutions. So our puzzle or the four corners of what we were trying to achieve now is completed. So there may be a technology in a vertical kind of thing. But the reality is what we will be doing is first making sure that we deliver on what we commit with this acquisition and then it will be consolidation place pretty much from this point forward.

Richard Tse

Okay, great. Thank you very much.

Operator

Thank you. Our next question comes from the line of Paul Treiber from RBC Capital Market. Your line is open.

Paul Treiber

Thanks very much and good morning. I just wanted to look at the combined voice business which includes the desktop sets and the conference phones. The question I have is that Polycom partners with other PBX venders. Can you just comment on that the potential how you’d manage the potential channel conflict around that?

Rich McBee

Yeah, so really, Polycom is a leader in the open SIP set market and we'll lead the Polycom brand in that market. So people will continue to put Polycom phones on their PBXs. And we do a lot of market research to understand that would that be acceptable and the answer was yes. They’re not going to put Mitel on their phones, but they definitely will keep Polycom it’s a well-known brand and a very good supply chain. So as long as we maintain that easy path and continue to innovate it the Polycom products, which product are I mean the innovation in there is off the page. So we’re very excited to that.

Mitel has proprietary sets basically we have a small SIP set, open SIP set business, but obviously Polycom will quickly be the dominant part of the family in that. Some of the proprietary SIP sets as well we can use some unique features in our call control and then we’ll make decisions what we’re going to long-term. But immediately out of the shoot we’ll be keeping the -- Polycom brand is extremely well recognized for technology innovation and quality. And we will not deviate from that we’ll hope to enhance that. And so we will keep their brand. And then we’ll make a decision on what we do with our proprietary sets. But there is some really unique things in the proprietary side that we’ll keep too. So we’ll have both.

Paul Treiber

Thanks for clarifying that. Just wanted to move onto -- just on the capital structure side. With leverage declining less than three times, do you anticipate that the interest rates on the refinance debt will be less than what Mitel is currently paying? And do you have an estimate on where it could go to?

Steve Spooner

So I think at the current time I would say we don’t anticipate it will be less than the current rate. However, we echo your comments that the substantial deleveraging, the significant cash flow generation capabilities for the business, our track record of driving synergies, the strength of the balance sheet all of the scale advantages of the business, we will certainly be getting out in front of the rating agencies with a view to pursuing improvement in the company’s current credit rating and ultimately if we are successful at that then there could be some attractive upside in terms of our interest rates going forward.

Paul Treiber

Okay, thank you. I’ll leave it at that.

Steve Spooner

Thanks, Paul.

Operator

Our next question comes from the line of Jess Lubert from Wells Fargo Securities. Your line is open.

Jess Lubert

Hi, guys. Thanks for squeezing me in. Also I have a couple of questions. First off, are there any breakup fees we should be aware of and maybe just from a Polycom perspective are there any colors on the deal given the heavy stock component and potential to protect shareholders in the event Mitel numbers continue to come in towards the lower end of the expectations as we’re seeing here in Q1?

Steve Spooner

So there are break fee structure in the event that Polycom were to walk Mitel with the entitlement to a payment of $60 million and if Mitel were to walk from the transaction Polycom would be entitled to $50 million. There are no color structures par say we’ve got a defined exchange ratio so that both shareholders group and also stock price will move up and down day-to-day, but by blocking in the exchange ratio, both buyer and seller are -- and have certainty to the shares that they are going to receive.

Jess Lubert

And then, I wanted to follow-up on a question that’s been asked a couple of times already on the call, but want to give another stab at it. But I guess just from a Mitel perspective I was hoping to better understand how you’re thinking about the Polycom phone business? And perhaps beyond Microsoft to what extend you think some of the other hosted providers and Polycom partners would still be willing to work with the company now that you’re likely to become a direct competitor?

Rich McBee

I think that in some of the -- in the businesses today we already use some of their products in various parts of the world. So the market is it’s an ecosystem, there is components of everybody’s products used in solutions. So we spend a significant amount of time studying this and understanding it. We think that as long as we do some basic things that will not upset the apple cart. The reality is we’ll continue to move on and continue to innovate. The reality is that Polycom phones and sets, they have unique patents, they have unique capabilities, they are very differentiating. And customers ask for, they ask for them by name.

And we have instances where our customers may ask for another vendor’s application or piece of the solutions and we’ll put it in it because at the end of the day we want to satisfy the customer. Polycom is a very high quality safe brand. when guys are putting their stuff on their desktops or their conference rooms, the reality is they know it’s going to work, they know it’s high quality for those things count.

And if you’re OEM in the product for a lack of a better term, the reality is as long as your name is still on the product and you still get the same quality of things and you still get them through the consistent supply chain et cetera, et cetera. I mean the reality is if you don’t upset that apple cart, they will continue to operate.

If you come in and some people have done that when they acquire assets, they come in and they change everything, change terms, change look and feel, change at that that is a recipe for disaster. We want to partner with the solutions that Polycom is providing to these OEMs. We want to enhance the capability with the broader set of technology portfolio. We don’t want to corner them out or anything like that. So we’ve always been an open platform company and Polycom is that too and we expect to continue that and expand the technology for our customer base not withdrawing in anyway.

Jess Lubert

Very helpful, thanks.

Operator

Thank you. Our next question is coming from the line of Todd Coupland with CIBC. Your line is open.

Todd Coupland

Good morning, everyone. I wanted to ask questions on synergies and what assumptions were made to make the statement this deal is accretive in 2017 from a synergy perspective.

Rich McBee

Well again Todd we’re not going to give specifics on our go forward internal model at this point in time. We’ll come out to the street once we’re through the period between now and close and we’ve advanced our integration work. But we’ve indicated that we’re targeting $160 million of synergies, which you can we believe we can realize both by 2018. We talked about -- we have obviously the street has modeled those there for Mitel and street has modeled out there for Polycom. So our best guidance is take a look at those projections until such time as we come out with updated target models on the combined business.

Todd Coupland

Okay. And just wanted to go to the combined tax rate of the company. So is it rough going to end up being roughly 20% plus or minus a point or two is that about the right number using both companies…

Rich McBee

That’s our best view today, yes.

Todd Coupland

That’s great, thanks gentlemen. Appreciate the color.

Rich McBee

Thanks, Todd.

Operator

Our next question comes from the line of Jonathan Kees from Summit Research. Your line is open.

Jonathan Kees

Great. Thanks for taking my question. Good morning guys, I wanted to ask you I guess this is more for Rich and for Steve. You already offering the video capabilities currently and obviously not all of your customers are turning that on right now given that feature is available. I’m just curious for like every 10 customers you sell your solutions how many of them actually turn on the video capabilities up for it?

Rich McBee

Well what we see is that our capability still is an option so if they’re buying that they’re probably turning it on as we are today. The reality is as you get into the bigger enterprise there is always a box that says do you have a video capability. We have to check that box and then we have to figure out which OEM solution we’re going to have we’re going to provide that. I think one of the things that Polycom brings is extremely well recognized footprint and install base of a huge number of video systems throughout the world.

So what we’re looking at doing is bringing in these capabilities to those customers and then also adding some of the differentiators like the mobile capabilities that we have. So I wouldn’t say that one in 10 of our customers use video. We have a video option, so what we’ve seen is increasing number of customers checking that option and purchasing it.

Jonathan Kees

Okay, alright. And let me ask you this then, in regards to this is more for Rich and for Peter. I am sure your customers have been reading the news about just potential tie up, potential merger just curious what kind of unsolicited feedback have you been getting from your customers regarding this tie up and have you note any pausing in terms of the purchases?

Rich McBee

So we haven’t, what we noticed is that in several CRM, the reseller news and some of those things where some channel partners have been asked about it and they’ve been highly favorable about it.

Jonathan Kees

And Peter?

Peter Leav

Yeah I think it’s the same story on this side and clearly the market overall has reacted well to what’s come out I am not sure I can explain how some of those things have come out, but nonetheless yeah I would echo Rich’s comments.

Jonathan Kees

Okay, great. And I guess one last question, I realize what we can do right now is plan we can execute until this becomes official and until it’s approved in [indiscernible]. I guess you had a big switch in routing vender earlier this week preannounced negatively and they specifically said enterprise spending is down I’m curious has there been a change in terms of your base assumptions for your models since like December I mean this has been in your funnel for some time has there been any change in terms of the assumptions that you’ve been making in the last several months?

Steve Spooner

Yeah, Steve here. I think again we’ll comment on our first quarter on our formal quarterly call, but we actually have been quite pleased with how the business performing there are pockets that I think if we look at Central America, Latin America has been a little weaker and that puts that a lot down to economic and challenges in that region more than anything else.

Our European performance continues to be quite strong. We had there has been you’ll see the odd time will it be a little a deal that slips from one quarter to the next, but overall the feedback that we’re getting from our sales organization is constant in the business and I think the other thing that we feel really good about I mean it remains a challenging market, but if you’re a channel partner and you’re looking who you’re going to represent in the market you’ve seen a number of voice players kind of get over of the business for lack of better words you’ve got other players that are struggling financially. You look at Mitel now with a breadth of portfolio between premise, cloud, mobile and soon video we are very much viewed as A, an innovative company, B, strong financially and C, a safe pair of hands to be the vendor of choice going forward. So we feel well positioned in the market.

Jonathan Kees

Great and I am I wasn’t clear I was saying the assumptions for this merger in terms of the potential revenue and synergies and stuff like that, but I think Steve you still answered the question in a way that yeah that was appropriate. So thanks a lot and good luck guys.

Steve Spooner

Thanks very much.

Operator

Thank you. [Operator Instructions] And we have one question and it is from the line of King Shi [ph] from S&Y Capital. Your line is open.

Unidentified Analyst

Hi, good morning. So couple of questions for you, the first question is regarding the earlier question on the treasury notice. I understand that this is not inversion, but then you still have a 60:40 ownership split but if you look through some of your past acquisitions in the last three years including Mavenir from a treasury notice point of view you own less than 40% of pro forma company so how do we think about how this would impact, your company will be impacted by the treasury notice that was put out earlier. And if so if there’s any out or kind of break fee mechanism for you to walk away from this transaction?

Steve Spooner

Yeah so we have done extensive analysis including the recent analysis about some of the treasury notice that have come out of late both with outside tax and legal counsel. As I reiterated several times in the call this is not a tax driven transaction we would fully expect that Polycom’s foreign operations that today are subject to repatriation taxes in bringing process back to the U.S. will continue Mitel has foreign operations that are ultimately report up to a Canadian parent and they will continue to be taxed as ultimately we can bring those earnings back to the Canadian company.

We do not see this transaction really changing the landscape there and I’m not going to give specific about percentages, but I would suggest you that our analysis may differ from what you’re suggesting. So again this is not a tax driven transaction and the region rules inversion rules apply to this kind of cross border M&A, but we are not for example taking a U.S. company with material operations in the U.S. and diverting headquarters to a low tax jurisdiction that’s what inversion rules are all about.

As Mitel has been in business for 40 some years as a Canadian headquarter global business we have done global M&A many-many-many times. And again I’ll reiterate this is not a tax driven transaction. And we anticipate that the blended tax rate for our business going forward both should model roughly a 20% rate in it. And if we see that rate changing because rules changes or our operation change we’ll obviously update this or even guide accordingly.

Unidentified Analyst

Okay, thank you. Just one additional question different topic, on accretion in 2017 is it got to roughly a low single-digit percentage accretion is that about right in the ballpark?

Steve Spooner

Yeah again we’re not going to comment further beyond our view that as we’ve modeled the combined business and the opportunities for synergies and the timing of realization that the deal will be accretive in ‘17 and we’ll get more precise on that once the deal is closed and that we bring formal guidance to the street at that time.

Unidentified Analyst

Okay, thank you congrats on the deal.

Steve Spooner

Great, thank you.

Operator

Thank you. Our next question comes from the line of Sachin Shah from Albert Fried and Company. Your line is open.

Sachin Shah

Hey, guys good morning again. So just follow-up, are you expecting this deal to close maybe in the first half or second half of the third quarter, is there any kind of guidance right now? I know its day one so…

Steve Spooner

Yeah it’s I would say safe target would be kind of our best thinking would be well not best but kind of likely in the August there’s a potential we can get it done in July it really is a function of the time period that it takes to get through the various review processes.

Sachin Shah

So the best July, but it could be pushed a little bit longer?

Steve Spooner

Yeah.

Sachin Shah

Okay fair enough. Congratulations and thank you.

Steve Spooner

Thank you.

Operator

Thank you.

Rich McBee

Okay with that -- with that I think what we’ll do is we’ll sign off today. I’d like to thank you again for joining us, if you have any further questions please feel free to call Mike our Head of Investor Relations. We look forward to speaking with you again on May 5th when Mitel will report its Q1 for 2016 our quarterly results. Thanks again.

Operator

Ladies and gentlemen thank you again for your participation in today’s conference call. This now concludes the program and you may all disconnect your telephone lines at this time. Everyone have a great day.

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