JDSU-NT--Monday July 24 6:21 PM ET
Amid Sale Talk, Nortel Pumps $1.9 Billion in Fiber
By Susan Taylor
OTTAWA (Reuters) - Nortel Networks Corp. (NYSE:NT - news) (Toronto:NT.TO - news) unveiled on Monday a $1.9 billion investment to more than double its fiber-optic manufacturing capacity, just as a source said it was in high-stake talks with Corning Inc. (NYSE:GLW - news) to sell the fiber-optic parts piece of its business.
The massive investment by Nortel, the world's No. 2 network equipment supplier, will add 9,600 jobs over the next 18 months. The company has already spent $660 million over the past nine months in a similar push to boost production.
Explosive traffic growth on the Internet is fueling tremendous demand for fiber-optic network systems that Nortel and rivals such as Lucent Technologies Inc. (NYSE:LU - news) produce. Those systems can handle greater volumes of voice, data and image information than traditional networks.
Fiber-optic components, critical equipment used in the those networks, includes such devices as pumps, lasers and filters that help push large volumes of data and boost capacity.
Nortel said it will spend $1.2 billion to increase the production of fiber-optics components, a unit that it is in talks to sell, a source close to the deal told Reuters. The investment will increase manufacturing capacity by 3.5 times in North America, Britain and Australia.
Nortel estimated on Monday that its fiber-optic parts unit will record revenues of about $2.5 billion in 2000, up 200 percent from 1999.
The remainder of Nortel's investment, $700 million, is earmarked for optical network systems.
``Maybe they just want to say 'Hey this isn't slipping -- this is not a fire sale','' said Michael Neiberg, analyst at Chase, Hambrecht & Quist on the timing of the announcement.
It is not surprising the two companies are in talks, he added, because they have been working together closely for at least six months preparing joint bids to build large networks.
``I am sure that over the past several months of conversation every potential structure that you could imagine of a deal has been discussed,'' Neiberg said. ``It makes sense.''
Less certain is the price tag such a transaction would carry.
While a Wall Street Journal story on Monday that cited unnamed sources referred to a $100 billion complex stock swap, that price tag represents a steep climb for Corning. Corning's market capitalization on Monday was $72.3 billion, while Nortel was worth $240.2 billion.
``We note that SDL Inc., which is about a third the size of Nortel's optical component group, was recently sold for $41 billion and thus the $100 billion does not seem that far-fetched,'' said a research report from Merrill Lynch on Monday.
The Journal also reported that such a deal could result in Nortel owning more than 50 percent of Corning, while Corning would own the optical parts unit and maintain its independence.
Shares in Nortel hit new highs in morning trade on discussion of the deal, but ended lower at C$117.45, down C$1.50, on the Toronto Stock Exchange and at 80, down 13/16, on New York. Corning shed 12 percent to end at 249.
The timing of talks between the companies makes sense, analysts add, in light of JDS Uniphase Corp.'s (NasdaqNM:JDSU - news)(Toronto:JDU.TO - news) stock bid, valued at $41 billion when announced two weeks ago, to take over rival SDL Inc. (NasdaqNM:SDLI - news)
That deal demonstrated the rich premium placed on fiber-optic component suppliers, analysts said, and forged a behemoth competitor for Corning, which sells fiber-optic cable and some optical components.
``It shouldn't stretch investor imaginations to see Corning and Nortel get together,'' said Kevin Slocum, an optical industry analyst at Wit SoundView.
``I think it's pretty clear that the two are talking -- they've spoken in the past...it ends up being a good competitive response to the JDS/SDL move.''
Nortel and Corning were in ``serious discussions'' last summer, Slocum said, but talks were shelved due to Nortel's concerns over the tight components supply market.
``It would have been risky to potentially subject the business to a combination and I just think Nortel couldn't bring itself to that kind of a point,'' Slocum said.
``We're a year later -- the component industry in general is producing at a much higher sustained rate. I think the prospect is much less risky today.''
The deal also makes sense for Corning, which must grow quickly if it wants to remain competitive with JDS Uniphase, the world's biggest supplier of parts for fiber-optic equipment in networks, analysts said.
``Corning was way down the aisle with SDL before JDSU jumped in with an offer,'' said Paul Sagawa, telecommunications analyst at Sanford Bernstein & Co.
``I suspect Corning, after Plan A to buy SDL fell through, that they cast about for a Plan B.''
Analysts say they will want more information when Brampton, Ont.-based Nortel reports second-quarter results on Tuesday after the markets close. Analysts expect it will top consensus profit estimates of 15 cents a share because of strong fiber-optic system sales. |
