Ciena-Nortel Deal Gets Approval

The telecommunications and network equipment company Ciena Corporation (CIEN - Analyst Report) has received the Court’s approval to begin bidding for Nortel Network Corp.'s (NT) optical and Ethernet division. The judges also said that Nov. 9 will be the deadline for bids and scheduled the auction for Nov. 13.

Ciena plans to acquire substantially all of the optical networking and carrier Ethernet assets of its rival Nortel Networks’ Metro Ethernet Networks (MEN) division, for a total of $521 million ($390 million in cash and 10 million in shares worth $142 million based on the Oct. 15 market price).

The company expects to incur integration-related costs of approximately $180 million, the majority of which will be paid in 2010, and expects the transaction to be significantly accretive in fiscal 2011.

The deal is subject to a competitive bidding process under the United States Bankruptcy Code and the Canadian Companies' Creditors Arrangement Act. In a stalking-horse deal, there is no guarantee that Ciena will get the assets.

Ciena’s Carrier Ethernet platform enables differentiation and provides a competitive advantage to the company. We believe the deal could provide strong growth potential to Ciena’s rapidly expanding metro Ethernet business and optical networking products. The Nortel deal would be its largest ever for Ciena, and would help boost its geographical expansion toward opening a major research center in Canada.

For the third quarter, Ciena generated approximately 14% of total revenue from metro Ethernet products. The company expects the Ethernet division to be a major contributor to growth going forward. Besides, the merger could double Ciena’s revenue.

Moreover, the acquisition would provide tough competition to other players in the networking industry such as Ericsson (ERIC - Analyst Report), Nokia (NOK - Snapshot Report) and Siemens (SI - Analyst Report). Longer-term, we view the deal to be positive for Ciena.

However, Ciena is a small player with very small revenues. Therefore, Ciena could face integration problems. The deal could pull Ciena into a net debt (debt exceeding cash) position. Moreover, risk of dilution remains.

Intense competition from companies such as Alcatel-Lucent (ALU - Analyst Report), Cisco Systems (CSCO - Analyst Report) and Tellabs (TLAB - Analyst Report) is eating into the company’s market share.

We have a Neutral rating on the stock.