Bookham Buys Nortel's Components Biz
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