ADTRAN, ADVA to merge for metro to access play

ADTRAN, Inc. (NASDAQ: ADTN) and ADVA (FSE: ADV) have announced they have agreed to merge. ADTRAN will acquire ADVA in an all-stock transaction with an equity value of €789 million ($981 million) and an enterprise value of €759 million ($896 million). The resulting company, ADTRAN Holdings Inc., will have combined revenues of $1.2 billion, based on the performance of the two companies over the last 12 months. The companies expect the deal to close in either the second or third quarter of 2022, subject to regulatory approvals and other customary closing conditions.

Tom Stanton, ADTRAN’s chairman and CEO, will retain those titles at ADTRAN Holdings. ADVA CEO Brian Protiva will become executive vice chairman of the combined company, with ADTRAN CFO Mike Foliano and ADVA CTO Christoph Glingener retaining their current positions. The board of directors will have nine seats, six filled by ADTRAN and the remainder by ADVA.

ADTRAN Holdings will combine the broadband access portfolio of ADTRAN, the metro and Carrier Ethernet businesses of ADVA, and the expertise both companies possess in software-defined networking (SDN) and other software-related fields. There is little overlap between the two companies’ product portfolios, and they possess complementary customer rosters; Stanton told attendees on an analyst call this morning that 74% of ADTRAN’s customers are in North America and 21% in Europe, whereas ADVA’s percentages for the two regions are 29% and 62%.

In addition to the opportunity for both companies to expand their sales geographically, Stanton added that a combination of massive investment in broadband globally and a desire in North America and Western Europe to avoid using Asian suppliers makes the timing of this combination advantageous. For example, Stanton and Protiva asserted that both companies were seeing tailwinds from broadband; Stanton commented that service providers typically upgrade their middle mile and related metro/edge infrastructure when they enhance their broadband networks, and the combined company would be positioned to participate in both activities.

Analysts appeared to appreciate the argument. “I think the merger makes sense because the two companies do not overlap on product. So, it won’t be value destructive like a merger among companies with similar products,” commented Jimmy Yu, vice president optical transport market research at Dell’Oro Group. “Also, with ADTRAN’s sales into Deutsche Telekom (DT) for access and ADVA’s sales into DT for optical, the current ADVA headquarters makes a great unified sales and customer support center to serve one of their biggest customers. Also, this helps ADVA’s optical business in North America, one of the company’s best region of sales. It will give ADVA a stronger presence in North America with a larger sales and support organization.”

“The merger makes a lot of sense as there is very little overlap in products or markets but a lot of complementary technology,” added Scott Wilkinson, lead analyst, networking components at Cignal AI. “The lack of overlap means that the overall market will likely not change much in the short term, but the combined company’s size could allow it to win over operators long term who prefer to buy from billion-dollar vendors. What has yet to be proven is if sales of PON can translate to sales of optical (and vice versa), as end-to-end sales are challenging.”

Terms of the deal

The all-stock offer for 100% of ADVA’s outstanding shares calls for each ADVA share to be exchanged for 0.8244 shares of common stock in the new holding company. The offer is equivalent to €14.98 ($17.67) per ADVA share based on ADTRAN’s three-month volume-weighted average price (VWAP) as of August 27, 2021, and represents a premium of 22% to ADVA’s 3-month VWAP for the same time period. At closing, ADTRAN shareholders will own approximately 54% of the combined company and ADVA shareholders the remainder, assuming a tender of 100% of ADVA shares.

Stanton estimated that the deal would be accreditive from the ADTRAN perspective in the first year after close and in the second from that of ADVA. The combination is expected to generate approximately $52 million in pre-tax annual cost synergies within two years after the close, thanks to supply chain efficiencies and operating model optimization.

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