UPDATE 3-Pace buys U.S. broadband co 2Wire for $475 mln

* Cash deal boosts position in Internet TV market

* 2Wire owned by consortium including AT&T

* Pace H1 pretax up 46 pct at 45.4 mln stg

* Adjusted operating margin up 1 pct point at 7.5 pct

* Shares up 15 pct, highest since early Jan

(Adds advisers, updates shares)

By Paul Sandle

LONDON, July 26 (BestGrowthStock) – Pace (PIC.L: ), the world’s
largest set-top box maker, has agreed to buy U.S. broadband
technology firm 2Wire for $475 million to broaden its customer
base beyond cable and satellite into the Internet TV market.

The British firm, which overtook Motorola (MOT.N: ) to claim
the market top spot in May, said 2Wire supplied AT&T (T.N: ) and
the deal would catapult it to number three in the global
home-hub market.

Analysts at JP Morgan Cazenove said they saw the deal adding
12 percent to forecast earnings in 2011 and 18 percent in 2012.
The company’s first-half results alone, which beat Cazenove’s
forecasts, justified a re-rating of the shares, they added.

“The acquisition of 2wire is important for two reasons in
our view: first, it allows Pace to enter a new market and supply
U.S. telcos, and second, it adds further software and gateway
expertise to further strengthen the company’s leading position
in converged devices,” they said.

“We have built a strong position in the U.S. with cable and
satellite operators and 2Wire, with its expertise in the
broadband residential gateway market, will enable us to address
a full range of U.S. operator requirements,” Pace Chief
Executive Neil Gaydon said.

Shares in the company, based in Yorkshire, northern England,
were up 15 percent at 215.7 pence in late trade, their highest
since early January.

Before the deal, Pace’s Internet TV business was dwarfed by
its cable and satellite operations, where it makes set-top boxes
for Canal+ (CNLP.PA: ) and Comcast (CMCSA.O: ).

Gaydon said broadband delivery would become more popular in
high-spending, competitive markets such as the United States.

“The residential gateway market today is about $3 billion
globally. It will grow in the next three to four years to nearly
$7 billion,” he told reporters on Monday.

“We see this market of combined media gateway, video,
broadband, voice-over IP and full managed services throughout
the home as a three-, four-year play.”

San Jose, California-based 2Wire is owned by a consortium
including Alcatel-Lucent (ALUA.PA: ), AT&T, Telmex (TLX.SN: ) and
Oak Investment Partners, and had sales of $667.4 million in the
12 months to end-December 2009.

SUPPLY-CHAIN SQUEEZE

Pace also posted on Monday a 46 percent rise in pretax
profit for the first half to 45.4 million pounds ($70.1 million)
on 21 percent higher revenue of 635.2 million pounds in the six
months to end-June. It said it was close to achieving its 8
percent operating-margin target.

Gaydon said the results would have been slightly better were
it not for supply shortages.

“It’s very tight,” he said. “The lead times are pushing out,
if anything. We are working closely with our customers and the
supply chain to manage a situation which is not getting better
and doesn’t look like it will get any better for the next 18
months.”

Gaydon said demand for high-definition TV was boosted by the
soccer World Cup, which finished earlier this month.

“Rather than the World Cup being a bubble, it’s actually
been a platform for further growth,” he said. “The market’s
growing, and we’re continuing to grow.”

Pace said given its strong position and ongoing demand for
digital television, it should deliver mid-single digit revenue
growth over the medium term.

Evercore Partners advised Pace, and Barclays Capital advised
2Wire on the deal.

Investment Basics

(Editing by Sharon Lindores, Mike Nesbit and Will Waterman)
($1=.6473 pounds)

UPDATE 3-Pace buys U.S. broadband co 2Wire for $475 mln