Food for thought
Networking: Interest In Advanced Fibre Grows With Cerent Investment
By Kevin Petrie
Staff Reporter
thestreet.com
SAN FRANCISCO -- Advanced Fibre Communications (AFCI:Nasdaq) may not
see a boost in business from its 5.5% stake in Cerent, but it may win
more investor applause when the startup goes public.
Cerent subleases offices from AFC in Petaluma, Calif. That degree of
proximity doesn't extend into their respective businesses, however.
Cerent's boxes, which younger carriers use to plug voice and data calls
into the widest network pipes, aren't closely tied to AFC's products,
which allow older phone carriers to pack more customers onto their
local networks. But analysts expect Cerent's IPO, which will likely
come later this summer, to add $150 million or more to AFC's market
capitalization of $1.1 billion and give it cash to expand its business,
perhaps through acquisitions.
"It's really more of a cash investment for them," says analyst Chandan
Sarkar with SoundView Financial, an investment bank in Stanford, Conn.
SoundView has no banking relationship with either company.
Cerent, citing an SEC-enforced quiet period, declined to comment for
this story. AFC officials didn't answer any questions about its
investments or make executives available for interviews.
It's All About Cash
Corporations are finding that the kind of me-too venture capitalism AFC
is testing with Cerent pays off, whether the startup becomes a useful
partner or not. When Cisco (CSCO:Nasdaq) acquired Fibex in a stock
transaction, Cisco rival Ascend's year-old investment in Fibex turned
into $100 million in Cisco stock. According to an SEC filing last
month, Ascend may sell those shares into the open market.
Many in the technology and venture-capital industry expect to see more
corporations invest in startups, regardless of whether they make good
partners.
"We're seeing all kinds of corporate investors these days," compared to
just two or three years ago, says general partner Promod Haque with
Norwest Venture, an investor in Cerent. SEC rules restricted Haque,
also a director of Cerent, from discussing Cerent in particular.
However, he says he encourages startups to enlist both VC firms and
corporations as backers. "Sometimes it can give you perspectives on
strategies that other corporations are employing," he says.
A Jewel Called Cerent
In addition to the undisclosed amount that AFC invested in Cerent in
September 1998, AFC chairman Don Green sits on Cerent's board. And two
former AFC execs have signed with Cerent since the company was founded
in January 1997.
Now Cerent is planning to raise $100 million in an IPO that Credit
Suisse First Boston is underwriting. Cerent doesn't state its market
capitalization in its initial SEC documents. But judging from the
recent performance of networking IPOs such as Juniper Networks
(JNPR:Nasdaq) and Redback (RBAK:Nasdaq), Cerent could easily top AFC in
dollar market value once it goes public.
Cerent, which started shipping commercial product in early 1999, posted
revenue of $9.9 million and a net loss of $29.3 million in the first
six months of this year, compared with an $8.7 million loss a year
earlier. AFC, by contrast, posted second-quarter revenue of $68.8
million, down 19% from the same quarter a year before; and a $4.5
million net profit excluding a restructuring charge, down from a $7.2
million profit a year ago.
And while Cerent expects to lose money for the foreseeable future, its
promising contracts with high-profile carriers such as PSINet and Qwest
(QWST:Nasdaq) could boost revenue and enhance its image on Wall Street
in coming quarters.
After cresting at 44 3/4 in April 1998, Advanced Fibre sunk to 4 by
last October thanks partly to curbed spending plans by international
carriers and lost business with GTE (GTE:NYSE). Since then, a
long-anticipated contract with Baby Bell SBC (SBC:NYSE) has nudged the
stock back up to 16 3/16 at Tuesday's close.
Only now is Wall Street starting to size up the Cerent jewels. Analyst
Conrad Leifur with US Bancorp Piper Jaffray upgraded Advanced Fibre to
buy on July 20, citing the SBC contract, the recent hire of telecom
veteran John Schofield as CEO and the planned Cerent IPO.
"AFC's stake in Cerent could be worth $150 million or more, roughly $2
per [AFC] share," wrote Leifur in his report, when AFC was trading at
15 3/16. For comparison, AFC now counts $143.2 million in cash, cash
equivalents and marketable securities. Initial SEC filings do not state
whether AFC will sell shares in the offering, but Leifur sees little
technological cooperation between the companies and expects AFC to take
profits.
"The eventual monetization of its Cerent stake would enhance AFC's
ability to pursue the acquisition strategy that is part of Schofeld's
game plan," Leifur says. He did not comment further. Piper Jaffray has
no underwriting or banking ties to either company.
One potential acquisition target, according to an equity analyst who
asked not to be named, is Anda Networks, a yearling in Santa Clara,
Calif. that in June started shipping bandwidth-boosting network systems
to carriers. Anda couldn't be reached for comment.
Regardless, AFC can use proceeds from the sale of its Cerent stake to
expand its wallet considerably while continuing its own turnaround
effort. One Silicon Valley CFO, who asked not to be named, says
numerous small companies such as AFC are making these minority
investments without having to disclose them to investors.
"It's so cheap that they can make a bet and then write it off," says
the CFO. Investors learn of the investment if it blooms and becomes
material. "You only have to have one success to justify all the
others," the CFO says.
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