Ciena outbids NSN in Nortel auction

Ciena (NASDAQ:CIEN) has outbid Nokia Siemens Networks (NYSE:NOK; NYSE:SI) to win the auction for Nortel Networks’ (OTC:NRTLQ) metro Ethernet and optical business unit.

Ciena agreed to pay about $769 million for the assets — $530 million in cash and $239 million in 6% senior convertible notes due 2017. It had originally bid about $521 million in cash and stock.

The Nortel unit reported $988 million in revenue for the first nine months of this year, down 21% from last year, and $377 million in gross profit (down 20% from 2008).

Ciena had been considered unlikely to outbid NSN, which has more to spend and was bidding with a private equity partner, One Equity Partners. In a statement last night, NSN said, “It did not submit the highest bid for Nortel’s optical networking and carrier Ethernet assets in the bankruptcy court-sanctioned auction that began on Friday morning and extended through the weekend. Nokia Siemens Networks believes that its final offer represented fair value for the assets, and further bidding could not be financially justified.”

It’s the second time this year that NSN was outbid for Nortel assets. The company also lost to Ericsson in the auction for Nortel wireless assets.

The deal will significantly increase Ciena’s stature in the industry, though it’s unclear how much, as the revenue for Nortel’s metro Ethernet business is declining throughout its bankruptcy. Revenue from the unit was down 26% from a year earlier in the third quarter.

Some of that recent sales decline was the result of customers’ uncertainty about Nortel’s future, Ciena’s senior vice president of strategic planning, Tom Mock, said in an interview this morning, adding that Ciena’s purchase could help dispel some of those fears. Also aiding Ciena is the fact that, according to the Dell’Oro Group, the optical equipment market should return to growth in the first quarter, as Ciena’s acquisition is closing, led in part by the 40-Gb/s equipment market that Ciena is gaining greater access to through this deal.

Though Ciena expects the deal to be accretive in 2011, analysts have been skeptical of the deal’s value, citing integration challenges and other hurdles.

“We are disappointed that Ciena felt it necessary to pursue the Nortel assets in what appears as a win at all costs approach,” Morgan Keegan analyst Simon Leopold wrote in a note this morning. “Not only are we concerned about the effects on the balance sheet considering the use of $530-million of cash, plus the assumptions of an additional $239 million of debt, but what it suggests about the core business. Eventually, the transaction may prove transformational and a success, but the deal introduces significant risks and may take many quarters to bear fruit. Ciena’s sales and headcount could double, and the degree of product overlap appears uncertain…We see risks from the pending integration challenges, and based on contract wins during the time Nortel’s unit has stayed on the block, we anticipate continued deterioration and market share loss.”

Ciena said today it will offer jobs to 2,000 Nortel employees — roughly doubling its own workforce.

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