Heard on the Street
Will Tellabs-Ciena Deal Mean
New Clients on Top of the Old?
By LINDA SANDLER
Staff Reporter of THE WALL STREET JOURNAL
Amid the current rush to merge by telecommunications companies, the $7 billion stock deal struck in June by Tellabs and Ciena is applauded as another strategic triumph. Analysts say that by combining, the two telecom-equipment makers will be better placed to serve the giant Bells and long-distance carriers.
They say Tellabs, with its older technology for moving traffic around on phone lines, needs Ciena, whose cutting-edge devices allow fiber-optic networks to carry more calls.
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Business: Telecommunications equipment manufacturer
Year ended Oct. 31, 1997*
ÿ ÿÿÿÿÿÿÿÿÿÿÿ1997 ÿÿÿÿÿÿÿÿÿ1996
Revenue (millions) ÿÿÿÿÿÿÿÿÿ$373.8 ÿÿÿÿÿÿÿÿÿ$54.8
Earnings (millions) ÿÿÿÿÿÿÿÿÿ$112.9 ÿÿÿÿÿÿÿÿÿ$14.7
Diluted per-share earnings ÿÿÿÿÿÿÿÿÿÿÿ$1.09 ÿÿÿÿÿÿÿÿÿ$0.15
Latest quarter (April 30, 1998):
ÿÿDiluted per-share earnings: $0.14 vs. $0.27
ÿÿShares outstanding: 101.6 million shares
Trailing P/E: 60ÿÿÿÿÿÿÿÿÿÿDividend yield: N.A.
*Pro forma, company went public in February 1997.
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But skeptics are wondering, as the two companies' shareholder votes next Friday on the merger approaches, what exactly Tellabs is buying. As new information comes in, some analysts question whether Ciena will ever get a big, hoped-for contract from AT&T. On top of that, interviews with Ciena's two primary customers, WorldCom and Sprint, indicate Ciena's revenue from them may not be as secure as many investors believe.
It is a dilemma for many acquiring companies and their shareholders: Will the acquired company's customers walk out the door?
Last year, Sprint bought an estimated $180 million of equipment from Ciena. But Sprint spokesman Jeff Chaltas says, "We're going to name a second vendor later this year" for the higher-capacity multichannel box. While some analysts anticipated that Ciena might lose a small part of Sprint's business, Mr. Chaltas says it isn't certain if Ciena or the second vendor will get the lion's share of Sprint's future purchases. "That depends on price and value, and what their product is."
Meanwhile, WorldCom, awaiting a merger with MCI Communications, stopped buying equipment from Ciena in February. Ciena Chief Executive Patrick Nettles assured investors that WorldCom's purchases from Ciena would resume later in the year. But WorldCom officials say there is some uncertainty about that because of the pending merger with MCI, known as an efficient purchaser.
While Ciena's multichannel boxes once were "the only game in town, competition caught up quickly with them," a WorldCom spokesman adds. And Leslie Aun, an MCI spokeswoman, says, "This merger has promised a fair amount of savings. Purchasing will be key."
Indeed, Mr. Nettles says, "I think they'll require adjustments" in pricing.
In Ciena's fiscal year ended Oct. 31, WorldCom and Sprint each contributed about 48% of Ciena's revenue, or a staggering 96% of the total. AT&T, meanwhile, is widely expected to contribute $100 million to Ciena's revenue next year. June documents for the Tellabs merger said that AT&T had stopped testing Ciena's 16-channel equipment, which multiplies fiber-optic capacity by 16, but would test Ciena's higher-capacity boxes.
But an AT&T spokeswoman says, "we will be dealing with multiple vendors." Indeed, AT&T said at a January analysts' meeting it would test Lucent Technologies' 80-channel system at year end. "And if Sprint picks somebody else with Ciena, AT&T could, too," says analyst Kevin Slocum of SoundView Financial Group.
He downgraded Ciena's stock on July 31 from a short-term "buy" to "hold," because of growing concern that Ciena might lose some of the projected revenue from AT&T to Lucent, the highflying AT&T spinoff, or France's Alcatel Alsthom, among others.
"It's going to be hard to make money in the Tellabs merger" until AT&T shows its hand, Mr. Slocum says. If Ciena's larger, more crucial relationships with Sprint and WorldCom also become uncertain, he says, "That's a different thing than most people are looking for."
Indeed, Wall Streeters expect Ciena's revenue to burgeon to $900 million or more next year, from an estimated $600 million or so in fiscal 1998. But if there is a question mark over that growth, the merger could be pricey for Tellabs, says one bear, who declined to be named.
In the merger, each Ciena share will be exchanged for a Tellabs share. Though both Tellabs, at 71 13/16 Thursday, and Ciena, at 71 3/16, are way off their highs, they still trade at similar prices.
Tom Scottino, Tellabs' investor-relations officer, says: "Due diligence continues until the day the deal closes."
Ciena's Mr. Nettles says, "we've factored in" Sprint's desire to have two suppliers. His confidence remains unshaken that WorldCom will be coming back.
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