Ciena Puts Stalking-Horse Bid on Table, Hopes for No Opposition

Some media sources have incorrectly reported – at least in their headlines — that Ciena has bought the optical-networking and carrier-Ethernet portions of Nortel Networks Corp.’s Metropolitan Ethernet Networks (MEN) division for about $521 million in cash and stock.

What’s actually happened is that Ciena has filed an official stalking-horse bid for most of Nortel’s MEN assets. Ciena has offered $390 million and 10 million of its shares, currently worth $131 million. Since the assets will be sold at auction, other parties can get involved, potentially outbidding Ciena. If Ciena gets its way, however, the deal will close in the first quarter of 2010.

In a departure from previous Nortel asset auctions, the Ciena bid would entitle the buyer to receive Nortel intellectual property and patents along with relevant products and technologies. Those products and technologies include Nortel’s long-haul optical transport portfolio; metro optical Ethernet switching and transport products; Ethernet transport, aggregation, and switching technology; multiservice SONET/SDH product families; and network management software products.

As part of the agreement, Ciena will offer jobs to at least 2,000 Nortel employees, about 85 percent of the total of those remaining in the MEN operations. Doubtless this provision was inserted not only to burnish Nortel’s besmirched corporate image in Canada, but also to ensure that the agreement meets little or no resistance from Canadian regulators. Ciena has operations in the Ottawa area already.

Based on the current agreement and given the structure of the transaction, Ciena expects to incur integration-related costs of approximately $180 million. Ciena sees the deal being accretive to its operational results during its 2011 fiscal year.

It is not a done deal, though. While Ciena clearly is hoping nobody challenges it for the right to own the Nortel’s assets, other bidders could surface. Ericsson, Nokia Siemens Networks, and Infinera, which recently opened an Ottawa-based design center, have been mentioned as potential counterbidders.

Mark Sue of RBC Capital Markets had an interesting take on what Ciena is trying to achieve by being so aggressive about its intentions. Said he:

“Sometimes dragging the girl out to the dance floor makes other dudes less inclined. There are other hound dogs sniffing around.”

Dodgy metaphors aside, if other dogs are on the trail, the game could get too rich for Ciena’s blood. Sue and others have expressed concerns about Ciena’s capacity to integrate the acquisition, and Sue has warned that Ciena should refrain from paying too much for the privilege of owning the Nortel assets. Any price marginally above the current bid probably would be considered too much by many analysts that follow Ciena closely.

Ciena needs to tread carefully. A Nortel deal could give it a scale that would make it a more attractive supplier to carrier customers, but it also could result in disaster if the transaction price is too high – placing significant debt on Ciena’s balance sheet – or if the post-merger integration is poorly executed.

Much now depends on whether a competitive bid emerges.


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