Spirent targeted in US takeover as earnings slide

The market capitalisation of Spirent Communications (SPT) eclipsed the £1bn mark after the network testing provider revealed that it had agreed to a takeover bid from Nasdaq-traded communications equipment firm Viavi Solutions Inc (US:VIAV). Viavi pitched the offer at 172.5p per share in cash, a 61 per cent premium to Spirent’s closing price on the last trading day prior to the offer. The deal also includes a special dividend of 2.5p per Spirent share, in lieu of any final dividend for 2023. There is significant overlap between the two businesses, and the proposed tie-up is expected to drive the combined group’s product development in artificial intelligence and machine learning.

The bid was announced in tandem with the release of Spirent’s full-year figures, which was probably a welcome distraction for shareholders given the group’s uninspiring financial performance. Although Spirent benefited from a marginal increase in the gross margin, adjusted net earnings contracted by 61 per cent to $44.3mn (£34.9mn).

From an operational perspective, management said that initiatives have delivered considerable cost savings and will continue to do so in 2024. Spirent secured more than 500 5G-related new contracts from more than 150 customers, yet order intake fell by 23.8 per cent to $477mn.

Group chief executive Eric Updyke expects that “the current challenges for the telecoms industry will continue and it is difficult to predict how long they will last”. Perhaps so, but the bid, though not exactly opportunistic, probably doesn’t reflect the potential recovery in capital expenditure among Spirent’s customer base as inflation and interest rate pressures moderate. However, the potential strategic benefits for both companies are undeniable. Hold.  

Last IC view: Buy, 153p, 02 Aug 2023