IHS Global Insight Perspective | |
Significance | With competition in the bidding process from Nokia Siemens Networks, Nortel has boosted the final selling price for the Carrier Ethernet business by 48% to "stalking horse" bidder Ciena Corp. |
Implications | Ciena is significantly increasing the size of its operations in taking on the Nortel unit, which has reported double Nortel's segmental revenues for the last nine months. |
Outlook | Ciena has significantly boosted its efforts in the optical and Ethernet markets, but will need to efficiently and effectively integrate Nortel's products and operating assets into its own operations. There are significant potential risks and benefits to the deal. |
Ciena Corp. has won the bidding for Nortel Networks Optical Networking and Carrier Ethernet unit, beating off bids from Nokia Siemens Networks (NSN) in a three-day auction with a final offer of US$769 million, including US$530 million in cash and US$239 million in convertible notes, Reuters reports citing anonymous sources. The previously agreed stalking horse bid amounted to US$390 million in cash and 10 million shares of Ciena common stock for a total value, based on the 6 October 2009 closing share price, of US$521 million (see World: 8 October 2009: Nortel Signs Stalking Horse Agreement to Sell Ciena Optical and Carrier Ethernet Business). The source notes that NSN and its private equity backers had made bids very close to the final price before withdrawing. NSN has confirmed that it did not submit the highest bid for the unit, noting that the company "believes that its final offer represented fair value for the assets and further bidding could not be financially justified" (see World: 19 November 2009: Nokia Siemens is Second Bidder for Nortel's Optical Unit).
Outlook and Implications
Ciena has seen revenues slump, with third quarter (ending 31 July 2009) revenues down by 67.1% year-on-year (y/y) to US$164.76 million, while revenues for the nine-month period were down by 34.1% y/y to US$476.36 million. For the nine-month period, income from operations swung from a profit of US$52.34 million to a loss of US$522.64 million and net income swung from a profit of US$64.29 million to a loss of US$554.36 million, although this was largely due to the hit from a goodwill write-down of US$455.67 million.
Ciena will be integrating a business that is somewhat larger than itself, including Nortel’s long-haul optical transport portfolio; metro optical Ethernet switching and transport solutions; Ethernet transport, aggregation and switching technology; multiservice SONET/SDH product families; and network management software products. This is described as "substantially all" of the optical networking and carrier Ethernet assets of Nortel's Metro Ethernet Networks (MEN) business. Despite a fall in revenues of 21.3% y/y, revenues for the metro Ethernet business still stood at US$295 million for the quarter ending 30 September 2009 and US$988 million for the nine-month period. Some US$207 million of this came from the data networking and security segment, which does not appear to be included, although Ciena noted that the revenues from the acquired parts of the metro Ethernet unit amounted to US$556 million in the first six months of the year when the optical segment generated US$433 million, the data and networking security solutions business generated US$92 million, and the services segment generated US$168 million. Nortel reported operating margins for the metro Ethernet segment of US$12 million for the quarter and US$81 million for the nine-month period (see World: 17 November 2009: Revenue from Remaining Nortel Operations Falls 20% Y/Y).
For Nortel, this is a significant improvement on the original bid from Ciena, although falls somewhat short of the "close to US$1 billion" deal it was reportedly close to striking before announcing that it was filing for bankruptcy protection (see World: 24 December 2008: Nortel Considers Options After US$1-bil. Offers for Ethernet Unit). At that point, major players, including Huawei and Cisco, were floated as potential bidders, but appear to have held off in the final bid. Huawei was reported by Dow Jones today (23 November) to be adding 600 staff to its employee base of 900 in North America, suggesting it is looking for organic growth rather than acquisitions (see United States: 23 November 2009: Huawei to Grow U.S. Employee Base by 600).
NSN has again missed out on taking a slice of Nortel (see World: 27 July 2009: Ericsson to Acquire Nortel Wireless Assets for US$1.13 bil.). Given its experience of post-merger pain, with problems still ongoing at NSN, some degree of reticence at picking up part of a troubled business and the need to not pay more than fair value is understandable (see World: 4 November 2009: Nokia Siemens Threatens 5,700 Job Losses as Cost Cutting Gets Serious). Dow Jones reports that NSN press spokesperson Riitta Mard has noted that the company may still look for acquisition opportunities or partnerships that could help expand the optical networking business and target North America.
Nortel has announced that due to the delay in the auction process for the Optical Networking and Carrier Ethernet business, the sale of the GSM/GSM-R business has also been delayed, with further details to be announced this week as it continues to sell off the remaining business units, including the LG-Nortel joint venture and the carrier VoIP solutions businesses.