Yesterday Ciena finally tipped its hand, confirming that it is in “advanced discussions to acquire substantially all of the optical networking and carrier Ethernet assets of Nortel’s Metro Ethernet Networks (MEN) business.”
The outcome of these discussions is uncertain and subject to negotiation of definitive agreements. Any agreements would be subject to a competitive bidding process under the United States Bankruptcy Code and the Canadian Companies’ Creditors Arrangement Act.
In formally and publicly declaring its interest, Ciena is attempting to flush any competing bidders into the open.
Although insolvent Nortel already has sold its wireless and enterprise assets at auction, having no more than minor difficulty attracting bidders for those properties, the company has met unanticipated challenges in flogging its MEN business.
Andy Woyzbun, a lead analyst at Info-Tech Research Group, points out that Nortel had been attempting to sell its MEN assets before it sought refuge in bankruptcy protection. Many observers anticipated that the MEN assets would go to auction before Nortel’s other businesses, but that wasn’t the case.
“The fact that it was the first that they wanted to sell, but the last to generate some interest indicates what the market felt the opportunity was for a third party to take over.”
Indeed, analyst estimates diverge sharply regarding the ultimate value of Nortel’s MEN business. Estimates on what Nortel is likely to get for the unit range from $450 million to as much as $1.5 billion. As reported by the Ottawa Citizen, the Nortel division had sales of US$1.8 billion last year and employs about 1,500 people. Revenue in the second quarter fell 27 percent to $333 million.
At one time, Nortel’s MEN assets were regarded as the company’s crown jewels, but market dynamics and technological advances by competitors have taken some shine off the jewelry.
DSAM Consulting Duncan Stewart thinks Nortel could get as much as $1 billion for the MEN assets. Of the Ciena announcement, Stewart said the following:
“Twice now we’ve seen a stalking-horse bid where somebody essentially, like at an auction, puts in a reserve or a minimum bid . . . . The issue here is we have no idea what the floor is and I don’t actually know if that means this is going to be a less competitive bidding process than the other two were or perhaps a more competitive one.
“Perhaps the reason Ciena has not announced a dollar amount . . . is that they don’t want to tip their hand.”
That could be true. However, in announcing its interest, Ciena is publicly challenging other bidders to come forward. The company’s braintrust probably believes that it doesn’t face much competition, in which case it should be able to get the assets at a bargain price.
Some analysts think Ciena needs to be disciplined about what it is willing to spend for Nortel’s MEN business. They can see how potential synergies can justify an acquisition price of $450 million to $650 million, but they would be highly critical of Ciena paying $1 billion or more.
Mark Sue, managing director of RBC Capital Markets, thinks the price of Nortel’s MEN business “peaked at $650M and may have now settled near $450M.” He believes Ciena can justify paying a price at the lower end of that range — and can structure a deal to support it — but he admonishes the company to avoid the “winner’s curse” of overpaying for the privilege of owning the asset.
With annual revenue of about $650 million, Ciena operates at a net loss. It had had 2,203 employees at the end of 2008, though it has shed some since then. Interestingly, as a result of previous acquisitions, Ciena already has engineering operations in the Ottawa area where a large percentage of Nortel’s MEN personnel is based.