NOVEMBER 23, 2009 By Stephen Hardy -- Details are beginning to emerge of the weekend-long process by which Ciena successfully bid $769 million in cash and convertible notes for most of the optical and Ethernet assets within Nortel’s Metro Ethernet Networks (MEN) unit. Meanwhile, the financial community and others have begun to react in the aftermath.
The MEN auction process began Friday morning and, with a few breaks, ran through Sunday night. Ciena and Nokia Siemens Networks (reportedly paired with private equity firm One Equity Partners -- see "Ciena has competition for Nortel's MEN assets") vied for the assets under the supervision of Nortel and its creditors. After establishing the ground rules, the auction process began with an announcement of the current high bid. A counter bid was then submitted, vetted by Nortel and its creditors, then revealed. The other bidder then had an opportunity to up their bid, which would in turn be certified by Nortel and its creditors. Subsequent rounds ensued as necessary.
According to a Nortel source, there were approximately 10 rounds of bidding in the auction before Nokia Siemens Networks threw in the towel. The winning bid comprised $530 million in cash, plus $239 million in aggregate principal amount of 6% senior convertible notes due in 2017.
Ciena Senior Vice President of Strategic Planning Tom Mock told Lightwave that the cash would come from the Ciena’s existing reserves. However, he said it was possible Ciena might try to raise funds at some point in the future.
The deal faces a hearing before bankruptcy courts in the U.S. and Canada on December 2. Mock said that some minor regulatory boxes would need to be checked before the acquisition closes, which he expects will occur in the first quarter of next year.
Ciena will acquire assets that generated approximately $1.36 billion in revenue in 2008 -- more than Ciena pulled in itself. The company also expects to bring aboard at least 2000 Nortel employees. Mock said the hirings will be global in scope and across a wide range of disciplines, including but not limited to R&D, sales, and services. Ciena will make the employment offers between the court hearing and final closing dates, Mock revealed. (For more on how Ciena plans to integrate the MEN assets, see "Ciena readies for Nortel MEN integration.")
Mixed reactions
The comparative sizes of Ciena and MEN, plus the amount of money Ciena plans to fork over, set most observers back on their heels.
“Ciena acquisition of Nortel's optics group is nothing short of a bet-the-company move,” Andrew Schmitt, directing analyst for optical at Infonetics Research, posted on Twitter. “You don't see all-in bets like this very often.”
The size of that bet and its inherent risks led Simon Leopold, communications equipment analyst and managing director at broker Morgan Keegan & Co., to downgrade Ciena’s stock from “Outperform” to “Market Perform.”
“We are disappointed that Ciena felt it necessary to pursue the Nortel assets in what appears as a win at all costs approach,” Leopold wrote in a note released this morning. “Not only are we concerned about the effects on the balance sheet considering the use of $530 mm of cash plus the assumptions of an additional $239 mm of debt, but what it suggests about the core business.”
Leopold noted that, at the end of the July quarter, Ciena had a net cash position of $265 million. After the purchase, Leopold estimates that Ciena will end the January quarter with a net debt of $519 million.
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