Dow Jones Newswires -- September 9, 1998
Ciena Down 14%, Tellabs Up 2% On Talk
Ciena Lost Contract
Dow Jones Newswires
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
Briefing Book for: CIEN | TLAB
Return to top of page | Format for printing
Copyright c 1998 Dow Jones & Company, Inc. All Rights Reserved.
|
