From RBC Capital (Dain Rauscher)...
Corvis announced a merger agreement to acquire Dorsal Networks, a privately-held, development stage company of transoceanic and regional undersea optical network solutions.
Corvis plans to acquire Dorsal in a stock transaction for approximately 40 million shares of CORV common stock (approximately 10% of total shares), valued at $87 million, excluding the 3% stake in Dorsal that Corvis already acquired through a previous agreement. Additionally, all outstanding options and shares of Dorsal held by employees will be exchanged for options and shares in Corvis. Corvis' acquisition of Dorsal is expected to be completed in the second quarter of 2002.
About Dorsal: Dorsal is a development stage company with products expected in the 2004 time frame. A key strength is Dorsal's management team, which includes veterans of the undersea systems business with experience in the development and global deployment of undersea optical networks.
With approximately 100 employees, the company's systems are designed to lower cost/bit of transoceanic and undersea regional transport networks by eliminating the need to backhaul traffic from points-of-presence (POPs) to landing sites. Dorsal's solutions are designed to increase system capacity, deliver lower cost-per-bit, and require a smaller footprint.
The company has a outsourced business model, with supplier partners delivering everything from repeaters, cables, marine vessels, and terminal equipment. This is expected to keep the cash burn down at around $1.5 million per month, allowing the company to be self-financed for the remainder of 2002, with its $16 million cash balance. At present, we are not expecting an impact on Corvis' operational expenses for 2002.
Key competitors in this market are major vendors including Alcatel (NYSE: ALA; Sector Perform-Average; $14.50), KDDI, Tyco, NEC, Fujitsu, and Pirelli. Alcatel, KDDI, and Tyco control 80% of the market. Gross margins are similar to terrestrial.
Rationale: Corvis provided the following key reasons for the acquisition at this time:
By delivering integrated terrestrial and undersea networking solutions, Corvis is hoping to expand its market opportunity with a single platform for global backbone networks.
Cost savings through joint development and integration of DWDM, amplifier subsystem, and network management systems.
Cost savings by leveraging Corvis' existing manufacturing and corporate overhead.
Accelerate time to market and market penetration for Dorsal's products.
Cross-selling opportunities, including Corvis' unrepeated festoon product. Dorsal is currently engaged in technology demonstrations, design verification, and RFP responses with several global carriers.
Stock Opinion
While the Dorsal acquisition expands Corvis' addressable market to include undersea systems, products are not expected to be available until 2004. In addition, because the products principally address greenfield opportunities, applications are expected to be in niche, short capacity markets, like inter-Asia. The overall undersea long-haul market is as weak as the terrestrial long-haul market, with pockets of strength, principally in Asia and Latin America. We continue to rate CORV stock Sector Perform-Speculative, with a price target of $4, based on 7x 2002 revenue multiple, in line with industry valuations. |
