Optical components

Bookham Buys Nortel's Components Biz

Bookham Technology plc (Nasdaq: BKHM; London: BHM) and Nortel Networks Corp. (NYSE/Toronto: NT) today announced a deal under which Bookham will acquire the remainder of Nortel's high performance optical components division -- a move that makes it number three in optical components, after Agere Systems (NYSE: AGR) and JDS Uniphase Corp. (Nasdaq: JDSU; Toronto: JDU) (see Bookham Buys Nortel Components).

Light Reading predicted the purchase three weeks ago (see Nortel Close to Components Sale ).

Bookham refers to the proposed arrangement as a "combination" with Nortel's optical transmitter and receiver and optical amplifier businesses. This is because of the size of the deal relative to the size of Bookham. Based on the midmarket closing price of Bookham's ordinary shares last week, the total consideration of the "combination" is valued at $111.6 million (£71.2 million), according to a statement issued by the company. Bookham's market capitalization is approximately $89.8 million, according to StockPoint.

As a result, and to comply with U.K. regulations, Bookham's shares have been suspended from trading today. The combination is subject to shareholder approval at a meeting scheduled for November 5.

It's interesting to note that Nortel will receive 61 million new ordinary shares in Bookham, giving it 29.78 per cent of the issued share capital, and making it the company's largest single shareholder. However, Nortel has agreed to abstain from using its voting rights -- unless the business affects Nortel's own share price directly -- so that Bookham may continue to carry out its business independently.

In addition to the $44 million in new shares, Nortel also gets warrants for a further 9 million shares and loan notes worth up to $50 million, plus a smallish amount of cash -- $10 million -- in respect of restructuring costs.

The question on everyone's lips is whether Bookham can make this purchase work. Large, ailing components businesses like Nortel's may be relatively cheap to buy but very expensive to own.

A key part of the deal, from Bookham's point of view, is a supply contract with Nortel worth a minimum of $120 million over the next 18 months. In addition, Nortel has agreed to purchase a fixed percentage of its components requirements over a three-year period following completion of the deal.

Although the deal is much bigger, Bookham appears to be trying to repeat the apparently successful formula of its purchase earlier this year of Marconi plc's (Nasdaq/London: MONI) components division, which also included a supply agreement (see Bookham Gets a Bargain). The formula proved successful inasmuch as Bookham is projecting a threefold increase in third-quarter revenues compared to a year ago (before the acquisition), in results to be announced later this month.

Before the acquisition by Bookham, Marconi's components group was viewed with suspicion by many potential customers, since the parent company was a competitor, says Steve Turley, Bookham's chief commercial officer. Branding those components with the Bookham logo has opened up a much wider customer base, he contends.

The same is true of Nortel's components business, which currently supplies most of its wares to the parent company. Turley reasons that if those products can compete on a level playing field with other independent components vendors, then it represents a good business opportunity for Bookham.

Even if these outside markets don't materialize, Nortel should contribute a minimum of $20 million per quarter to Bookham's revenues following closure of the deal, according to Bookham's CFO Steve Abely. That's a substantial boost over the next quarter's predicted revenues of $11.7 million (£7.5 million) and brings the company's break-even target of $75 million significantly closer.

But what of the financial impact of integrating the Nortel units into Bookham? Although it isn't taking on any debt obligations associated with the two loss-making Nortel divisions, Bookham will gain around 1,300 more employees.

Nortel's transmitter and receiver business, based in Ottawa and Paignton, U.K., employs about 940 people, while the optical amplifier business, based mainly in Paignton and Zurich, Switzerland, employs a further 380 people. The majority of these staff will be transferred to Bookham, the company says, although there will be some consolidation and redundancies.

Bookham claims the financial impact of the integration will be minimal. "We have been working on this transaction in order to get a cost reduction that will work for us," says Abely. "We are planning a 25 percent reduction in overheads by the end of the first quarter" (following closure of the deal).

Abely also points to the fact that the Bookham's burn rate was lower in the quarter following the Marconi acquisition than it was the previous quarter. "We learnt a lot going through that exercise, and we can apply that learning to do it better next time.

"Our business plan doesn't depend on an industry recovery any time soon."

Analysts think it could go either way. "It really comes down to a market timing issue," says Jay Leibowitz, president of Leibowitz Strategies. "Short-term the risk is the danger of added burn for Bookham. Long-term the advantage is Bookham strengthens its actives line and its amplification product line, so it strengthens its ability to be one of the few remaining full product-line supplier for optical networking applications. How long the market takes to grow again will be critical to determining whether the short-term risk outweighs the long-term benefits."

If the sale goes through, Nortel will have rid itself of virtually all of its components activity, as it intended. The other major components group, Coretek, was closed down two weeks ago (see Coretek Is Closed).

Bookham's Turley says Bookham wasn't interested in Coretek because the company has its own tunable laser technology, acquired from Marconi, which it considers superior (see Marconi Claims Tunable Laser Advance).

With Nortel out of optical components, attention will now turn to Agere, which is also aiming to quit the market and focus on electronic components (see Lights Out for Agere's Opto Biz and Agere's Exit From Opto: Sad but Sensible). When and if Agere finds a buyer or shuts down its optical business, Bookham could end up as the World No. 2 in optical components. Gulp.

— Pauline Rigby, Senior Editor, Light Reading
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MrLight 12/4/2012 | 9:36:53 PM
re: Bookham Buys Nortel's Components Biz I am assuming Nortel's HPOC SIPR is part of the deal.

I wonder what the total quantity of IPR Bookham will now be with its own IPR + MOC IPR + Nortel HPOCS IPR? will now be?

In April 2002 , Robert Green, Bookham's Vice President of Business Development stated "Bookham Technology holds substantial intellectual property rights (IPR), in excess of 500 patent filings, of which approximately 125 have been granted in Europe and 46 in the U.S.

During 2001 the company, excluding the Marconic Optical Components (MOC), filed over 100 patent families - a rate of filing of optical component patents on a par with major vendors in the optical industry, such as Agere.

The rate and scope of patent filing has increased since the acquisition of MOC, particularly with regards to III-V technology. Bookham has also gained 'ready-made' IPR through the MOC acquisition."

MrLight :|
MrLight 12/4/2012 | 9:36:53 PM
re: Bookham Buys Nortel's Components Biz Additional parts of the announcement:

"The announcement said that the economies of scale generated by the creation of the new enlarged group will facilitate increased cost efficiencies, and noted that as part of an independent entity, there will be greater opportunity for the components generated from the business units to be sold to other leading systems manufacturers "who may not previously have purchased components from Nortel, as Nortel is one of their competitors".

Giorgio Anania, President and CEO of Bookham, was quoted as saying that Bookham believes that the "optical communications market has good long?term potential, though market conditions are currently depressed and are likely to remain depressed for the next several quarters. In this environment, having scale and technology is critical to achieving profitability in the optical components sector, as it is characterised by high fixed manufacturing costs, such as optoelectronic semiconductor fabrication facilities, and by heavy R&D investment".

He noted that as system vendors attempt to streamline their operations, they are attempting to reduce the number of relationships they have with suppliers, and those that will ultimately be successful will be offering a lower?cost position, a broader product portfolio and delivering next generation technologies."

MrLight :|
kur1ous 12/4/2012 | 9:36:48 PM
re: Bookham Buys Nortel's Components Biz
Does anybody know
what happens to the 1000 Nortel employees potential severance packages? Are they somehow garanteed to receive a similar package to what they would have gotten with Nortel should the Bookham business not go as well as they expect it to?

I hope I am wrong but it shure seems like this is the only good thing about this deal for Nortel. Loose 1000 employees without paying the 100 Million dollar severence that goes with it...

chips 12/4/2012 | 9:36:44 PM
re: Bookham Buys Nortel's Components Biz There are no guarantees unfortunately.
The positions Bookham will offer to the Nortel staff they wish to retain will have as little severance protection put in the contract as they can get away with.

- chips
allidia 12/4/2012 | 9:36:43 PM
re: Bookham Buys Nortel's Components Biz They were a company built around a flawed product that through brilliant management has been able to acquire mature product and customers through acquisition. JDSU should fear this wolf in sheeps clothing. Any comments on the canning of Coretek? Could it be that the big guys are realizing that 4 channels are more than enough in Metro Networks and thus the need for tunable lasers like Agility and high channel DWDM like Lightchip's have no market? Sparing for 4 channels is not to costly and BKHM kept NT's laser group.
bw 12/4/2012 | 9:36:41 PM
re: Bookham Buys Nortel's Components Biz Allidia,

Contrary to what you stated, BKHM acquired a variation of SG-DBR full range tunable laser product through Marconi component merger, which is very similar to Agility's. They clearly believed this platform is better than the Coretek approach.

FiberGuy 12/4/2012 | 9:36:40 PM
re: Bookham Buys Nortel's Components Biz to add... you also cannot discount Asian suppliers
FiberGuy 12/4/2012 | 9:36:40 PM
re: Bookham Buys Nortel's Components Biz So with Nortel and Agere giving up optical components, and Bookham stepping to being #2 behind JDS... who then rounds out the top 5?

Any thoughts on the below guess?

1. JDS
2. Bookham
3. Oplink
4. Avanex
5. Dicon

Also, any thoughts on the idea the JDS is the next to exit "low food chain" optical components?

jssreenath 12/4/2012 | 9:36:40 PM
re: Bookham Buys Nortel's Components Biz Severances are for overpaid executives that drive their companies into the ground, not for hard working engineers that try to make companies successful.
lite-brite 12/4/2012 | 9:36:39 PM
re: Bookham Buys Nortel's Components Biz umm....Agilent? Finisar? OCP?
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