December 20, 2006, 10:43 am
Early Read On Redback Deal: Ericsson Gains, But Juniper Sags
Posted by Eric Savitz
Last night’s announcement that Ericsson (ERIC) will acquire Redback Networks (RBAK) for $25 a share in cash has triggered a flurry of Street research, and a scaramble to assess the fallout. So far, the Street seems pleased with the offer, bidding up the prices of both the seller and the buyer. Other telecom equipment stocks are sagging, apparently on concern on the creation of a stronger competitor. Here’s a rundown on what it all means…
…For Redback investors:
George Notter, Jefferies: Obviously, Redback has been rumored to have been in play for a number of quarters now. In recent days, the stock has run from $17 to $21 as investors speculated about a takeout…A $25 share price implies a valuation of 5.7x our EV/2007 sales estimate - the very high end of communications equipment multiples. Moreover, it represents a giant 70%-80% premium over the $14-$15 share levels that Redback was trading at just several weeks ago…suggest that shareholders eagerly tender their Redback shares.
…For Ericsson investors:
Sandeep Malhotra, Merrill Lynch: As Ericsson transforms itself from a mobile infrastructure company to one that supplies mobile, fixed and IP equipment to telecom operators worldwide, Redback fills an important gap in the area of IP edge routing that is an essential component in the deployment of VoIP and IPTV in next-generation networks that run on IP…Redback could add 1% to our Ericsson revenue estimate for 2007 but should be slightly dilutive. However, if Redback generated $500 million [in] revenue in 2008, that would be 2% extra revenue for Ericsson in 2008 and should lead to slight EPS accretion.
Inder Singh, Prudential: Although the RBAK acquisition is small compared to the recent mega deals in the industry, we believe it expand’s ERIC’s reach in the IPTV market, especially in the U.S. We believe this positions ERIC as a strong contender for AT&T’s IPTV initiative as well, where it has had an ongoing trial…this announcement should allay investor fears of a larger dilutive acquisitions by ERIC.
…for other telecom equipment stocks:
Inder Singh, Prudential: We believe this deal has slightly negative spillover effects on Juniper (JNPR) (could weaken ERIC/JNPR partnership, on Cisco (CSCO) (ERIC may gain a first mover advantage) on Motorola (MOT) (this ups the ante for Motorora to gain more critical mass in IPTV) and possibly Tellabs (TLAB) (lower chances of being acquired by ERIC.
Paul Silverstein, Credit Suisse: We believe this acquisition has adverse implications for JNPR - in particular, for JNPR’s edge routing revs, which account for approximately 35% of JNPR’s total revs. ERIC has been JNPR’s second most prominent channel partner and accounting for 11 of [Q3] revs, with edge routing likely accounting for at least 25% of that amount. Further, the acquisition poses a risk to all of JNPR’s edge routing revs to the extent it strengthens RBAK’s competitive position. The acquisitions also fuels our concern that ERIC, given its low 40s margin structure, will be willing to be even more aggressive in using price as leverage to gain market share. The overlap between RBAK and JNPR in edge routing also significantly reduce the likelihood of ERIC’s making a bid for JNPR.
Kenneth Muth, Robert W. Baird: We believe implications for JNPR are mixed as the acquisition validates the importance of the IP Edge router market but likely threatens Ericsson’s reseller relationship with Juniper.
In today’s trading: |
