Ciena Falls After Digital Teleport Chooses Pirelli (Update5)
Ciena Falls After Digital Teleport Chooses Pirelli (Update5) (Updates with Tellabs denying it knew Ciena wouldn't win contract.)
Linthicum, Maryland, Sept. 9 (Bloomberg) -- Shares of Ciena Corp., the No. 1 maker of equipment that increases the capacity of telephone networks, plunged 30 percent after the company failed to get a $100 million contract, raising concern that Tellabs Inc. will scrap its takeover.
Ciena fell 8 17/32 to 19 3/4 in trading of 34.1 million, making it the most active U.S. stock. Shares touched 18 1/4, less than the February 1997 initial public offering price of 23.
Digital Teleport Inc., a Ciena customer, today awarded a $240 million equipment contract to Pirelli SpA, an Italian cable and tire company. Ciena, which gets 95 percent of its revenue from WorldCom Inc. and Sprint Corp., last month failed to win a contract from AT&T Corp. and warned that third-quarter earnings will be less than half expectations. ''No one has any confidence in Ciena's business outlook,'' said Scott Vergin, a money manager at Lutheran Brotherhood, which owned 678,000 Tellabs shares as of June. ''The market's telling you this deal's not going through.''
Tellabs rose 1 1/2 to 44 15/16 and was the fourth-most active U.S. stock.
First Customers
Digital Teleport was one of Ciena's first customers, said Timothy Savageaux, an analyst at Volpe Brown Whelan & Co., who has ''neutral'' ratings on Ciena and Tellabs.
Now Pirelli supplies about 80 percent of Digital Teleport's wavelength division multiplexing hardware that helps phone networks carry more data, he said.
Many expected Ciena, the world's largest maker of WDM equipment, to get $100 million of the Digital Teleport contract. ''The market thought that Ciena had won that contract and apparently they did not,'' said James Schmitt, an analyst at Westcountry Financial, who doesn't rate Tellabs or Ciena.
While investors were surprised about Digital Teleport, Tellabs and Ciena executives knew Ciena wouldn't win the contract when the companies renegotiated their acquisition agreement two weeks ago, people familiar with the agreement said. Spokespeople for Ciena and Tellabs denied the companies knew Ciena wouldn't get the order before today.
The new 0.8 share exchange offer reflected assumptions that Ciena wouldn't get the order from St. Louis-based Digital Teleport, the people said.
Lower Price
Tellabs agreed to pay $7.1 billion in stock for Ciena on June 3. Since then, the value of the acquisition has dropped to $3.88 billion, as Tellabs lowered the price and Tellabs shares fell amid concern about the purchase.
The agreement now values Ciena at about $36 a share. Yet with its shares trading at half that, some investors are betting the transaction won't be completed without a further reduction, or won't go through at all. Since reaching a record close of 88 5/8 on July 20, Ciena has plunged about 80 percent. ''Tellabs is now egregiously overpaying,'' Savageaux said.
Ciena said Digital Teleport is still buying Ciena's equipment, which is used to boost the capacity of phone networks. ''They haven't said we're out,'' said Denny Bilter, a spokesman at Ciena. He declined to give details on Ciena's contract with Digital Teleport or how much revenue it generates.
Tellabs spokesman Tom Scottino said the company has seen Pirelli's press release about the contract and is ''trying to understand it.'' He declined to comment further.
Ciena has agreed to pay Tellabs a $200 million penalty if it walks away from the sale, while Tellabs would pay Ciena $100 million if it backs out, according to a filing with the Securities and Exchange Commission.
Pirelli
Pirelli said its Cables and Systems unit will supply Digital Teleport with $140 million of cables and $100 million of WDM equipment. Pirelli's contract follows similar agreements with Deutsche Telekom AG and France Telecom SA.
It wasn't the first blow leveled by Pirelli.
On June 1, the Italian company said it will get $30 million plus royalties from Ciena to settle a patent-infringement lawsuit Pirelli brought two years earlier. Pirelli sued Ciena in U.S. District Court in Wilmington, Delaware, claiming Ciena's products violated patents for optical transmission systems.
As reported, Ciena expects third-quarter profit of 13 cents to 15 cents a share, less than half what analysts were predicting. It also expects revenue of $129 million, 5.9 percent above the $121.8 million a year earlier.
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