Ciena Down 14%, Tellabs Up 2% On Talk Ciena Lost Contract
Dow Jones Newswires -- September 9, 1998
By Shawn Young
NEW YORK (Dow Jones)--Word that Ciena Corp.
(CIEN) lost most or all of a telecommunications
equipment contract with a competitive local exchange
carrier sent Ciena's stock down 21%, and lifted shares
of its merger partner, Tellabs Inc. (TLAB), by 7%.
The possible loss of the contract, which the companies
did not immediately confirm, could further complicate
merger plans between Tellabs and Ciena, said
SoundView Financial Group Inc. analyst Chandan Sarkar.
Sarkar said the firm believes that at least part of a
contract for telecommunications equipment between
Digital Teleport Inc., based in St. Louis, and Italy's
Pirelli SpA (I.PIR), came at Ciena's expense.
Such a development could be material to the merger
agreement Ciena and Tellabs had to renegotiate
recently, he said.
Recently, shares of Tellabs were up 3 3/16, or 7.3%, to
46 5/8 on Nasdaq volume of 7.6 million. Ciena shares
were down 5 17/32, or 19.6%, to 22 3/4 on Nasdaq
volume of 8.8 million, compared to a daily average of 4
million.
Digital Teleport, which is privately-held, agreed to
award Pirelli 80% of its business for wave-division
multiplexing equipment, which increases the capacity of
fiber optic lines, said Chief Financial Officer Gary
Douglas.
He said the contract is valued at about $100 million
over three years.
Ciena has been a supplier of equipment to Digital
Teleport, he said, and the contract with Pirelli reduces
the scope of the potential relationship between the
companies.
"What it came down to was a combination of price,
quality and ability to deliver," Douglas said.
Douglas said Digital Equipment is more of a wholesaler
than a competitive local carrier. It has Ciena equipment
in service and has not had problems with it, Douglas
said.
A spokesman for Tellabs, located in Lisle, Ill., declined
to comment, citing a quiet period related to the merger
agreement between Tellabs and Ciena, which has
headquarters in Linthicum, Md. Ciena did not respond to
a request for comment.
The companies were forced to renegotiate their merger
agreement late last month after Ciena followed news of
an earnings disappointment with word that AT&T Corp.
(T) would not become a customer as expected. Tellabs
cut its price for Ciena and a shareholder vote on the
deal was postponed until November.
Bad news from Ciena, the renegotiation and delays in
the shareholder votes have spooked investors since the
merger, then worth $6.9 billion, was announced in July.
At recent share prices, the renegotiated deal has been
valued at about $4 billion.
Wednesday's trading indicates that investors are having
serious doubts that the merger will take place at all, said
Volpe Brown Whelan & Co. analyst Timothy
Savageaux.
Ciena shares recently traded at 21 3/4, 41.5% less than
Tellabs would pay for it under the terms of the merger
agreement, which calls for Tellabs to pay 0.8 of its
shares for each Ciena share. Tellabs recently changed
hands at 46 1/2.
Under the existing terms, Tellabs is "egregiously
overpaying" for Ciena, said Savageaux.
As an existing customer that fits Ciena's stated goal of
broadening its customer base, Digital Teleport should
have been an easy contract for Ciena to keep, he said.
"It tells you more about a tightening competitive
environment and more about the likelihood of earnings
volatility," he said.
Ciena has damaged Tellabs' credibility on Wall Street,
which had been superb, Savageaux said.
"If they (Tellabs) threw in the towel tomorrow, they
could probably restore credibility," he said.
In contrast, one arbitrager who asked to remain
anonymous said Pirelli's contract with Digital Teleport
may not be as bad for Ciena as it initially seemed
because the contract is for an older, relatively low-end
8-channel system, and Pirelli was already a leading
vendor to Digital Teleport.
"This does not change the relationship," said the
arbitrager.
Ciena spokesman Denny Bilter said the company
expected competition for the Digital Teleport contract
and has built that assumption into its plans. He said he
does not know if the company has altered revenue
estimates in light of Pirelli's winning 80% of the
business.
He also said he does not know if the news comes as a
surprise to Tellabs or if the chief executives of Tellabs
and Ciena had spoken about the merger agreement or the
contract Wednesday.
"That's not a huge contract," he added.
Ciena remains a Digital Teleport vendor and its
relationship with the company has not changed, he said.
-By Shawn Young; 201-938-5248
shawn.young@cor.dowjones.com
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