Ciena nears ‘transformative’ Nortel deal

Ciena (NASDAQ:CIEN) is getting closer to what analysts say would be a “transformative” acquisition for a company with a long history of bold M&A. The equipment vendor now appears to be the front-runner to acquire Nortel Networks’ optical and carrier Ethernet business, analysts say, having announced being in negotiations yesterday.

[UPDATE 10/7/09: Ciena bids $521M.]

According to Seeking Alpha, Ciena issued a press release on Friday that put the company’s bid for Nortel’s assets at about $550 million ($400M in cash and about $150M in stock — 10M shares). The company won’t comment on that, and the release itself is no longer visible. Ciena’s announcement yesterday didn’t mention specific prices.

Based on opening bids for Nortel’s CDMA/LTE business, which were about a fourth of sales, bidding for the Metro Ethernet Networks division would likely start at around $350 million, UBS analyst Nikos Theodosopoulos said in a note this morning, so the $550M price would take things up a notch.

But RBC Capital Markets analyst Mark Sue believes interest in the assets has “dwindled” in recent months among potential bidders like Ericsson, Nokia Siemens, Huawei, Tellabs, and Cisco, leaving Ciena and Infinera as the most serious bidders. “We estimate the price peaked at $650M and may have now settled near $450M,” Sue wrote in a note today.

Ciena has a history of tackling big acquisitions and integration challenges, but this one could be a bit like the dog chasing the car, according to Theodosopoulos. “It would transform Ciena,” he wrote, adding at least 1300 employees to Ciena’s 2100, doubling or tripling its revenue and — as Ciena has $1 billion in cash and perhaps $265 million in net cash — potentially leaving it further leveraged.

“Ciena would go from a product cycle story to one of scale,” Theodosopoulos wrote.

Sue suspects Ciena may try to fund the deal by raising nearly half a billion dollars in equity, diluting the stock by perhaps $0.04 or $0.05 per share next fiscal year.

“In the end, the customer base is similar, the technology fits well into the portfolio, and it fills a gap until the market for 100 gig gains hold,” Sue wrote.

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