Broadcasters across the country and around the world are wondering how Tuesday’s announcement that Harris Corp. wants to spin off its storied broadcasting business will play out. The division’s president, Harris Morris, says the company “is going to seek a buyer who is committed and focused on this business and on growing in the media space. At the same time, we will try to eliminate disruption in the short-term while we go through the sale process.”
With the possible exceptions of Sony and Panasonic, no technology company has a greater presence in the broadcasting business than Harris. It’s been supplying transmitters to radio and TV since 1957 and over the past decade it has broadened its TV offerings to include most of the other major components of a station except cameras and production switchers.
So, it was big news Tuesday — but not necessarily a big surprise — when the Harris Corp. announced that it would be spinning off its broadcast division, hopefully by the end of the year, telling securities analysts that the underperforming unit was “no longer core” to the company, which has evolved into a major defense and government contractor.
Joe Zaller, of Devoncroft Partners, who closely tracks the broadcast technology marketplace, said a colleague put it best: “How can broadcasting not be core to Harris when Harris is so core to broadcasting because of its size, its people and its reputation?”
Good question, but a more pertinent one, particularly for the many broadcasters that rely on Harris technology to stay on the air and keep the dollars flowing, was what would become of the broadcast division.
Harris Morris, the president of the division for the past two years and one of the architects of Harris’s billion-dollar expansion in the 2000s, issued a statement shortly after the announcement saying that it would be “business as usual.”
And in an interview yesterday afternoon with TVNewsCheck, Morris provided further assurances.
“Harris is going to seek a buyer who is committed and focused on this business and on growing in the media space,” he said. “We’re going to try to find an optimal owner … that will let us accelerate what we’re trying to do. At the same time, we will try to eliminate disruption in the short-term while we go through the sale process.”
As Harris Corp. CEO William Brown told securities analysts on the earnings call Tuesday, Morris said he was hopeful a cash deal could get done by the end of the year.
“There’s a number of potential buyers who have for some time expressed an interest and said: ‘If the board ever decides to separate broadcast, I would be interested in looking at it’; and then there are a number of folks who, since the announcement yesterday, have expressed an interest.”
One insider who asked not to be identified said the company had definite buyers in mind. “This is not just a For Sale sign in the front yard,” he said.
Morris tamped down speculation that Harris might be willing to sell the division piecemeal — transmitters to one company, infrastructure products to another, back-office software to yet another.
“They decided to divest the broadcast division as a whole and our hypothesis is that that’s the way buyers will want to purchase it as well,” he said.
Morris said the company is close to hiring an investment banker to help in finding a buyer and closing a deal.
Michael Lewis, who follows Harris Corp. for Lazard Capital Markets, said he doesn’t believe Harris will have any trouble unloading the division one way or another. “Say there isn’t a successful sale, they could spin it out to shareholders as a separate company.”
Chris Quilty, an analyst with Raymond James & Associates, was not quite so sanquine. “[T]he process could prove to be messy,” he wrote in a research note. “Harris is arguably the largest player in the broadcast equipment industry, and as a result may find that there are a limited number of players able and/or willing to purchase the business outright.”
Like Quilty, Zaller could think of no likely buyers from among the many broadcast vendors he follows. Ironically, he said, the company with the biggest appetite for acquisitions in the market over the past several years has been Harris itself.
One possibility is a private equity firm. When Technicolor put Grass Valley, another venerable broadcast technology company, on the block a few years ago, it was a private equity firm that finally stepped up — Francisco Partners.
Private equity needs management, and Morris said he would be happy to supply it. “I find it’s a competitive and challenging space,” he said. “There’s a lot of exciting things left to happen there and we are still strategically very well positioned to capitalize on them.”
It is difficult to get a handle on how the division is doing financially since the corporation has not broken out the numbers of the division since last August for its 2011 fiscal year report. At that time, the division reported revenue of $554 million, up 14% from fiscal 2010.
In discussing the division Tuesday morning, the company said it had revenue in the fiscal third quarter of $111 million, down 14% from the same quarter last year. That resulted in an operating loss of $4 million in the quarter, compared to a gain of $2 million the year before.
Harris Corp. CFO Gary McArthur attributed the poor numbers to “weaker demand in North America and longer international sales lead time.”
Explaining the decision to sell, CEO Brown said that the “combination of a lack of effective integration by the company over the last decade — coupled with a market outlook that is not as promising today as once believed — led us to conclude that … the business is best owned by another party.”
Perhaps figuring that potential buyers might be listening, Brown also said there was nothing fundamentally wrong with the division. “[W]e believe the business has the potential for strong growth and margin expansion, is led by a solid leadership team and has long-term value for someone who brings a focused approach to the broadcast and media market.”
Morris characterized the division business as “sound.”
“We have certainly improved the operating results significantly over ’09, which was a tough year for both this business and also for the industry,” he said. “There are very solid growth plans and operational plans to improve the ability to take money to the bottom line. We think it will be attractive to buyers.”
None of executives would mention an asking price. On the earnings call, however, Brown said that $200 million of the proceeds would be used to buy back shares, but that he expected the sale price to be “substantially higher than that.”
Zaller would not hazard a guess, but noted that other broadcast tech companies have been going for three times revenue. Harmonics paid three times for Omneon in 2010 and Harris itself paid “three times plus” for Leitch Technologies in 2005.
Such a multiple would peg the division at between $1 billion and $1.5 billion. “But they are only going to get what somebody is willing to pay,” Zaller cautioned.
The announcement of the sale surprised no one who was paying attention to the goings-on at the company.
The first clear signal that something was amiss came two years ago when Harris ousted longtime broadcast equipment executive Tim Thorsteinson and replaced him with Morris, a management consultant who helped develop the strategy and then joined the division in 2008 to help implement it.
But the fate of the division was probably sealed last November when Brown replaced Howard Lance as CEO. Lance was committed to broadcasting; Brown is not.
“This business was assembled over a period of a decade by … Lance, and it was pretty clear he was too emotionally attached to proving the success of that endeavor to sell the business,” said analyst Quilty.
Harris Corp. and its broadcast division have clearly grown apart. Over the years, the corporation has evolved primarily into a provider of communications and IT systems for the military and other government entities. The broadcast division was one of the few units in the commercial marketplace.
Of the corporation’s $6 billion in revenue in fiscal 2011, only about 10% came from the broadcast division. Aside from the division lackluster performance, Brown said that it “was no longer aligned with the company’s long-range strategy” and “no longer core.”
The analysts seem to like what they heard on the earnings call. “Investors in Harris were uniformly in favor of the business being sold, not fundamentally because it was a bad business, but because strategically it doesn’t fit well in the Harris portfolio. It has underperformed for a period of time,” said Quilty.
Between 2000 and 2007, Harris Corp. transformed the division from primarily a supplier of broadcast transmitters to a one-stop broadcast shop with a series of acquisitions totaling nearly $1 billion.
The big plays: Louth Automation in 2000 for $85 million, Encoda Systems in 2004 for $340 million, Leitch Technologies in 2005 for $450 million, Aastra Digital Video in 2006 for $35 million and Optimal Solutions Inc. (OSI) in 2006 for $32 million.
In addition to transmission gear, Harris’ TV offerings now include master control automation, traffic & billing software, signal processing, servers, graphics, fiber optic links and multiviewers. The division also has a strong line of radio broadcasting products.
As a Bain & Co. consultant to Harris, Morris helped gather all the pieces. To help execute the one-stop strategy, he joined the division in 2008. When the division faltered, he took over in February 2010, hoping to deliver the promised return on the billion-dollar investment.
Morris brought in a new team. One of the first thing it did was whack 8% of the workforce — about 140 people, but it also continued to make investments in the broadcast division and develop new products, which was evident at this year’s NAB Show.
Morris said he still believes in the one-stop strategy. Brown’s assessment that “we didn’t integrate those acquisitions as quickly or as completely as we would have liked is true,” he said. “But we have invested heavily in that integration and interoperability in the last two years, and I think we’re seeing good progress.”
From a timing standpoint, Zaller thought that Harris was smart to wait until after NAB to announced its decision. If it had done so before the show, questions and speculation would have undermined Harris selling efforts.
Miranda, a Harris rival in the automation business, was caught in such a trap. As it tried to do business at NAB, he said, everybody was asking about reports that it was about to be sold, Zaller said. “It was a huge management distraction. They had to deal with all of the questions that Harris didn’t.”
To have Harris and Miranda going through this process at the same time makes it doubly interesting,” Zaller added. “Whichever one gets sold first will certainly set the value expectation for the other and a lot of other deals to come.”
Does the sale mean the Harris brand will pass into broadcasting history like RCA and others?
Terri Black, director of the marketing for the division, said division management understands the value of the brand and will try to hang on to it. Something like Harris Media or Harris Broadcast would work, she said.
“But brand is more than a name. It’s how you treat your customers. It’s the way you live your business. It’s the product, the quality and the service you deliver.
“Worse case: If we don’t retain the Harris brand, we are going to retain what matters to the Harris brand.”