Lumentum to buy NeoPhotonics for high-speed optics, ‘new markets’

Lumentum Holdings Inc. (NASDAQ: LITE) has agreed to purchase fellow optics firm NeoPhotonics Corp. (NYSE: NPTN) for $16.00 per NeoPhotonics share in cash. The terms set NeoPhotonics’ total equity value at approximately $918 million. Lumentum also has agreed to provide up to $50 million in term loans “to fund anticipated growth” in NeoPhotonics’ business. The transaction, scheduled to close in the second half of next year, has been unanimously approved by each company’s boards. The deal remains subject to regulatory approvals.

Speaking to analysts via a conference call this morning, Lumentum President and CEO Alan Lowe cited NeoPhotonics’ strengths in 400G and greater transmission technology, including silicon photonics, narrow-linewidth tunable lasers, and RF integrated circuits, as part of the impetus for the purchase agreement. The combined company will provide a more comprehensive product portfolio for communications applications, Lowe added, while opening the door to new market opportunities through a strengthened R&D team. He did not specify what those opportunities might be, although he noted that photonic products are finding their way into a growing number of applications, including vehicles, manufacturing, industrial sensing, safety and security, health care and the life sciences, and environmental sciences. Lumentum is already active in some of these areas, while NeoPhotonics has been focused on optical communications.

On the same call, NeoPhotonics President, CEO, and Chairman Tim Jenks echoed Lowe’s assessment of the combination’s benefits, while adding the merger would enable his company to address market needs with greater financial stability. NeoPhotonics, with Huawei as its largest client, has been particularly hard hit by U.S. government efforts to prevent Huawei and other Chinese firms from doing business in the U.S. and elsewhere as well as benefiting from U.S. technology suppliers – including NeoPhotonics.

Lowe said he expects to achieve more than $50 million in annual run-rate cost synergies within 24 months of the deal’s consummation. He cited Lumentum’s successful integration of Oclaro and creation of such synergies as proof of his company’s abilities in this area. Lowe said there is minimal overlap between the product lines of the two companies, although both offer CFP2-DCO coherent optical transceivers for 100G/200G/400G applications; NeoPhotonics also has 400G modules in QSFP-DD and OSFP formats. Asked during the call why he would buy a company that makes optical transceivers when he sold off Lumentum’s datacom transceiver business, Lowe said that NeoPhotonics’ coherent modules offer greater value as an opportunity because of the company’s vertical integration. He also noted that no product rationalization efforts have begun.

Lowe also said he anticipates that the addition of NeoPhotonics will prove immediately accretive to the combined company's non-GAAP earnings per share upon closing.

The $16 per share price represents a 39% premium on yesterday’s closing price of NeoPhotonics’ common stock. However, trading today briefly pushed NeoPhotonics’ share price beyond that figure, sparked by speculation that a bidding war might erupt for the company similar to the tug of war over Coherent Inc. that Lumentum lost earlier this year (see “II-VI wins bidding for Coherent”). NeoPhotonics shares ended the day at $15.97.

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