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.
Business: Telecommunications equipment manufacturer
Year ended Oct. 31, 1997*
1997
1996
Revenue (millions)
$373.8
$54.8
Earnings (millions)
$112.9
$14.7
Diluted per-share earnings
$1.09
$0.15
Latest quarter (April 30, 1998):
Diluted per-share earnings: $0.14 vs. $0.27
Shares outstanding: 101.6 million shares
Trailing P/E: 60 Dividend yield: N.A.
*Pro forma, company went public in February 1997.
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. |
