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Technology Stocks : JDS Uniphase (JDSU) -- Ignore unavailable to you. Want to Upgrade?

To: Tulvio Durand who wrote (17992)	2/7/2001 2:59:18 PM
From: bob zagorin	Read Replies (2) \| Respond to of 24042

JDS-SDL MERGER RECEIVES APPROVAL; SELLING ZURICH PLANT TO NORTEL FUNDAMENTALS Price (02/06/01) $50.00 FY Ends Jun 2000 2001 2002 NASDAQ Comp (02/06/01) 2,660 Revenue(MM) $1,770.9 $3,829.5 $5,583.8 Prev Est.(MM) NC NC NC 52-Week Range $37.00-153.42 EPS Fully Diluted Shares (MM) 1,015 Q1 $0.08A $0.18A $0.24E Market Cap(MM) $50,750 Q2 $0.09A $0.21A $0.27E Q3 $0.11A $0.21E $0.29E Avg Daily Vol(3Mo.)(000s) 23,300 Q4 $0.14A $0.23E $0.31E Fiscal Year $0.42A $0.82E $1.11E Previous Est. $0.42 $0.82 $1.11 P/E NM 61.0x 45.0x Pro forma results exclude nonrecurring items and amortization of goodwill. Fiscal 2000 is pro forma for E-TEK. Source: Epoch Partners _______________________________________________________________________________ * JDS Uniphase announced that it had received approval from the U.S. Department of Justice (DOJ) to acquire SDL, Inc. after agreeing to sell its 980 nm pump laser chip plant in Zurich, Switzerland to Nortel Networks for up to $3 billion in stock. * The purchase price represents $2.5 billion in stock plus $500 million in stock as deferred consideration if Nortel does not meet purchase commitments through December 2003. * JDS Uniphase also announced the signing of new and expanded purchase agreements with Nortel in connection with the deal. * The divestiture of the Swiss plant was in response to the DOJ's concerns about market concentration in 980 nm pump chips that would result from the merger. We estimate that JDSU and SDL's combined share of 980 nm pump chips currently exceeds 80%. * Following the announcement of the necessary approval of all relevant regulatory authorities, the remaining hurdles are the two companies' shareholder meetings, scheduled for Feb. 12, and integration after the merger. _______________________________________________________________________________ Jumping Regulatory Hurdles JDS Uniphase announced that it had received approval from the U.S. Department of Justice and Canadian antitrust authorities for the merger with SDL and said that no further regulatory approvals were required. Approval for the merger was expected, since JDS Uniphase gave confident financial guidance during its recent earnings call, and as reflected by the narrowing of the spread between SDL's share price and JDS Uniphase's offer. The other remaining steps are the approval from both companies' shareholders on February 12 and the integration of the two companies following the merger. Extending and Expanding Supply Agreements In a conference call, JDS Uniphase management said that in connection with the Zurich-plant transaction, JDS Uniphase and Nortel had extended and expanded their supply agreements. The supply agreement calls for a bigger contribution from JDS Uniphase in certain component contracts, including products already under contract and ones not currently covered. The agreement is expected to take effect by June 2001 and run through December 2003. It calls for Nortel to pay JDS Uniphase up to $500 million in stock if Nortel's purchases do not meet a specified level. We view this as somewhat [HI similar to a “take-or-pay” agreement for up to $500 million of JDS Uniphase product over the next 32 months. Spreading the $500 million over the next 2.75 years results in approximately $180 million in additional revenue per year, or an increase of 4% to our $4.7 billion revenue estimate for JDS Uniphase's in calendar 2001. Divesting Zurich Facility to Nortel The agreement calls for Nortel to pay $2.5 billion in stock for the Zurich plant, its employees, its intellectual property, and a small facility in Poughkeepsie, NY that supplies tools to the plant. JDS Uniphase management noted that Nortel was the largest customer for the pump chips produced in Zurich. Management also said the acquisition would close on Tues., Feb. 13 or Wed., Feb. 14. In a Securities and Exchange Commission (SEC) filing, JDS Uniphase disclosed that the Zurich facility contributed less than 5% of JDS Uniphase's revenues during the first six months of fiscal 2001 (which total $1.7 billion). In our calculations, we assume a range of 4.5% to 5% of revenues for the first two quarters of fiscal 2001 and a sequential revenue growth rate between 21% (the reported sequential revenue growth rate of JDS Uniphase's actives segment from fiscal 1Q01 to fiscal 2Q01) and 26% (equivalent to JDS Uniphase's announced four-times-over-18-months capacity expansion). Using these four assumptions and the $2.5 billion sale price, we arrive at a price-to-sales multiple for the Zurich facility between 7.1x (26% revenue growth and 5.0% of sales) and 9.0x (21% revenue growth and 4.5% of sales.) This price-to-forward-sales-multiple range is below our estimate of JDS Uniphase's price-to-calendar 2001 sales multiple of 11.3x. We attribute the difference to three factors: (1) JDS Uniphase strengthens its relationship with its largest customer through an extended and expanded supply agreement; (2) we believe the universe of buyers was limited by the strategic fit and the ability to pay and probably limited the pool of potential buyers for this asset; (3) JDS Uniphase and SDL were working under a constrained schedule. Strategic Implications We think this merger benefits JDS Uniphase in the following ways: * It was defensive -- it kept SDL from joining a JDS Uniphase competitor such as Corning, though it puts JDS Uniphase's pump chip plant in Nortel's hands. * It eliminated a leading source of competition in pump lasers: SDL. * It increases the breadth and depth of the product line with leading technology (980 nm pump lasers, Raman amplifiers, modulators, arrayed- waveguide gratings (AWGs), optical network performance monitoring equipment, and transmitter/receiver electronics). * It combines JDS Uniphase's thin-film filters and fiber Bragg gratings with SDL's AWGs (through its PIRI acquisition) to provide a comprehensive, market-leading portfolio of DWDM (dense wavelength division multiplexing) wavelength discrimination tools. PIRI: The Icing on the Cake One of the overlapping product lines not addressed by the DOJ remedy was wavelength discrimination, an area addressed by SDL's PIRI subsidiary. PIRI is the leading manufacturer of optical components using AWG technology. This technology represents a promising platform for the manufacture of integrated optical components on a wafer using semiconductor-industry economics. We think PIRI's transition into JDS Uniphase's hands further strengthens the company's lead in wavelength discrimination components. Outlook for JDS Uniphase Shares By acquiring SDL, JDS Uniphase gains best-in-class pump lasers, additional capacity, and PIRI. In addition, JDS Uniphase will now be out of the “penalty box” regarding future acquisitions, which have largely been off-limits since the merger announcement in July. Having assembled a company that dwarfs its nearest publicly traded, pure-play competitor, with technology cherry-picked from among the industry's best companies, we think JDS Uniphase remains well positioned to satisfy the exploding demand for bandwidth. In our view, long- term investors will be well served in acquiring JDS Uniphase shares, which are trading according to our estimates at a calendar 2001 P/E to growth rate of 1.1x, versus 2.7x for the S&P 500 Index. _______________________________________________________________________________ COMPANY PROFILE JDS Uniphase is a leading merchant supplier of value-added fiber-optic components, subsystems, and modules for telecommunications networks.