Ciena Risks Its Future on Nortel Ops

Ciena Corp. (CIEN) has prevailed in acquiring Nortel Networks’ (NT) global optical networking and carrier ethernet businesses.  The issue here is not whether Ciena is taking on Nortel’s poor legacy.  It is whether the price is too much, and whether or not Ciena can do much better of a job than Nortel did. 

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It isn’t as if Cisco Systems (CSCO) or another strong performer is acquiring it. The fact is Ciena’s history is not a painless one.

The acquisition is for Nortel’s products, contracts, patent and intellectual property.  The new price win is being put at a figure of $769 million in cash and debt, broken down as some $530 million in cash and $239 million in convertible notes, maturing in June, 2017. 

When the Ciena bids came out in early October, the bid was said to be roughly $521 million between cash and stock.  While it was never known what the real bids would go out at, this now includes another $239 million in debt if the shares do not rise much over the next seven years.

Ciena has one more fiscal quarter on its own, as the deal will not close until first quarter, 2010, assuming all regulatory and court approvals go through.  Those should be approved internationally, as they have been locally.

This buyout is for the few jewels inside the charred house of Nortel. These include the rights to the fiber optic capacity boosting technology that is meant to increase network speeds exponentially.  Ciena also effectively doubles its size, as 2,000 workers are expected to be hired versus a prior figure of roughly 2,200 workers at Ciena, according to its last annual report.

As of July 31, Ciena had over $1 billion in cash and short-term investments.  That sounds great for a company with a market cap of $1.1 billion, but the company’s long-term debt was already at over $807 million.  If you back out intangible assets, the net tangible assets came to just over $405 million.  Take out the cash and add on the debt, and it is clear that Ciena is becoming a much more leveraged operation.

Ciena loses money currently. Its forward revenues without this deal are rather different than its history.  Revenues were $902.4 million in 2008, $779.7 million in 2007, and $564 million in 2006.  Thomson Reuters has estimates for this year (OCT-2009) at $643 million and next year (OCT-2010) at $727.5 million.  It is also expected to lose money for 2009. Those estimates are barely positive on earnings at a mere 10 cents per share in 2010, and that was before counting the extra leverage and the integration of the Nortel operations.

The 52-week trading range for Ciena shares is $4.98 to $16.64.  The stock was above $14 before the company announced its intention to make this bid back in early-October.  Ciena’s stock is also down about 70% in the last two years, and it shares the wall of shame trait with Nortel, JDS Uniphase (JDSU) and other fallen technology-angels of having conducted a reverse stock split in recent years to artificially boost its share price.

It was about a decade ago that Ciena and Tellabs (TLAB) had a failed merger.  Ciena is taking a risk here at a time when global carriers and telecom providers are still rather tight-fisted on increasing their spending.  If there is a double-dip recession, or if carrier spending tightens back up in late 2010, Tellabs might get another shot at a Ciena deal. 

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