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Nortel Will Pursue IPO of Fiber-Optic Components
Unit, CEO Says
By Erik Schatzker
Santa Clara, California, Sept. 15 (Bloomberg) -- Nortel Networks Corp.
expects to sell shares in its fiber-optic components unit by next year, freeing
the fast-growing business to compete for acquisitions by creating a valuable
new stock.
``By next summer you'll see this IPO'd,'' Chief Executive John Roth said in an
interview. ``Then we'll start to use that as a currency to acquire the other
things we need.''
The unit, which supplies many of the parts that Nortel uses to make its
fiber-optic equipment, was valued at $100 billion in July when Nortel and
Corning Inc. discussed combining their component businesses. Those
negotiations ended with no agreement. Nortel probably will sell 10 percent to
15 percent of the unit and keep the balance, Roth said.
Roth had mentioned the possibility of an IPO for the components unit on
several occasions since the Corning talks fell apart.
It would be the second IPO of a fiber-optic components unit in less than six
months. Nortel rival Lucent Technologies Inc., the world's No. 1 maker of
phone equipment, plans to sell about 20 percent of its semiconductor and
components business in a first- quarter IPO. Analysts have said that offering
could raise as much as $15 billion, the most in U.S. history.
Meanwhile, the challenge for Brampton, Ontario-based Nortel, the biggest
maker of fiber-optic equipment, is building up its components business with a
broader base of customers. Some analysts have estimated that Nortel buys
almost all of the unit's production, a level of concentration that many investors
would find unsettling.
Not Servicing Rivals
Roth said he recognizes the need to diversify and plans to have the business
sell to companies, such as Juniper Networks Inc., that need devices to
connect their products to optical networks. He doesn't expect to succeed in
selling to Nortel's competitors in making systems, as Lucent does now with
its components unit.
``You have to have some accounts with a history actually based on market
prices, not internal transfer costs,'' Roth said in the interview earlier this week
in Santa Clara, California. ``But I'm not putting in capital equipment to service
my competitors; my goal is to build a strong Nortel by having a strong
components unit.''
Nortel has been preparing its components unit to stand alone for about four
months. It reorganized the business in May, combining smaller units
scattered throughout the company under one management team headed by
Barbara Callaghan.
Triple Production
While the Corning talks were taking place, Nortel announced that it would
invest $1.2 billion to more than triple its production of fiber-optic components
in the next 18 months. At the time, it said the unit would have sales of $2.5
billion this year at market prices, more than triple the equivalent amount in
1999 and comparable with the revenue of No. 1 components maker JDS
Uniphase Corp.
Nortel also has made several acquisitions in the past year to beef up the unit's
product line, including CoreTek Inc. for $1.17 billion in June and Photonic
Technologies Inc. for $32 million in May.
Roth said Nortel will follow the same model it used to sell a stake in Entrust
Technologies Inc. in August 1998 and is using for Elastic Networks Inc., which
registered for an IPO in June. Unlike Nortel, Lucent plans to spin its
components unit to shareholders a few months after the IPO.
``We're not interested in separating the unit,'' Roth said. ``We always want
control. That's why we didn't do the Corning deal. That's why we wouldn't sell
it.''
Nortel hasn't yet hired an investment bank to manage the sale. Its regular
bankers are Credit Suisse First Boston Corp. and J.P. Morgan & Co., which
earlier this week agreed to be acquired by Chase Manhattan Corp.
Roth said he doesn't feel a need to complete the components IPO before
Lucent sells a stake in its unit.
Nortel shares today fell 25 cents to 71.25 in late trading. The stock has risen
41 percent so far this year.
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