Broker snap: Pace purchase makes strategic sense

Having met with the management of digital set-top box maker Pace in the wake of the company's interim results finnCap has nudged up its fiscal 2010 earnings estimates. The broker is now expecting full year profit before tax of £1,270m from £1,176m previously after the stronger than expected first half performance. "We are however broadly maintaining our FY11 forecasts at this point until further information is released on the proposed acquisition of 2Wire," finnCap said.# On the subject of the proposed acquisition of the US networking gateway maker, the broker believes it makes strategic sense, despite the obvious cross-over with the Bewan acquisition completed during the first half of the year. "Furthermore, 2Wire appears a perfect match in terms of 'best-in-class' products, leading customers and high value-added services in a similar fashion to the existing Pace business. The proposed EV [enterprise value] cost of $425m, puts the acquisition on 0.9x EV/Sales but we suspect the estimated $30m of cost synergies can be exceeded. We estimate this acquisition will be up to 10% earnings accretive to FY11 and significantly higher thereafter," the broker said. The broker has a "buy" recommendation on the shares and a fair value estimate of 153p per share.