Tellabs May 'Edge' Towards Redback
Analysts say Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA) management is at least thinking about acquiring an interest in the access equipment vendor Redback Networks Inc. (Nasdaq: RBAK).
The news comes on the heels of increased interest in Redback shares. Redback’s stock has gone from the $6.50 range up to the $10 to $11 range in the past six months, with some recent high-volume trading accompanying M&A rumors. (See Redback Shares Rock: What's Up?.) In addition, sales of Redback’s SmartEdge products have picked up and many anticipate some new contracts coming in Europe. (SeeRedback's SmartEdge Perks Up , Alcatel Names Its 21CN Partners, Redback Wins Deal, and FOTE: VOIP, Video & Carlsberg.)
Today, Merrill Lynch & Co. Inc. analysts fanned the flames of speculation, releasing a research brief that described why a Tellabs/Redback merger might make sense.
According to the brief, Tellabs would like to find some hotter product lines to help shrink its reliance on an aging crossconnect business. Crossconnect sales now account for roughly 30 to 35 percent of Tellabs revenues, yet the product line will grow only 1 percent next year, analysts say.
Merrill Lynch analyst Tal Liani believes Redback’s B-RAS, Ethernet aggregation, and edge routing products might put a positive charge in Tellabs’ portfolio. “Various industry analysts size the metro Ethernet and subscriber services segments at about $1 billion each over the next 3-4 years, with double digit annual growth rates,” he writes in the brief.
“We view this potential expansion very positively, as it would enable Tellabs to establish a presence in growth areas of capex," Liani says.
And Liani’s not the only one talking about Tellabs/Redback. “I’ve heard more and more speculation on this from analysts lately,” says investor Herb Chen of Chen Capital, who has been watching the story. “If you are Tellabs, you have one and a quarter billion in cash and you are in a low-growth core business,” Chen told Light Reading on Monday.
Chen believes Tellabs management may have signalled to Liani that the company is in the market for an acquisition. In doing so, Tellabs may be floating the idea to investors to gauge their potential reaction to such a deal. Chen says companies often back away from acquisition plans if they believe their stock might be degraded.
There's another factor involved. Earlier this year, the hedge fund Creedon Keller & Partners -- a Redback shareholder with a 16.6 percent stake -- said it wants to shut down its fund and get rid of its holdings, including stock. The company, however, in late August assured analysts it wouldn’t sell the Redback stock immediately; Creedon now appears to be waiting for the right buyer, perhaps a strategic one such as Tellabs. (See Redback's Anti-Panic.)
Chen believes the “right buyer” is somebody like Tellabs. “What, are they going to let the stock just sit there and hope it grows? No, they are going to look for the buyer who will pay a premium for it.”
An acquisition by Tellabs might make sense for Redback, too. “As they deal more and more with these RBOCs, their balance sheet just doesn’t have the bulk that they would like it to have, so it makes a certain amount of sense,” Chen says.
Chatter has also been heard in recent weeks saying that one of Redback's top distributors might be interested in buying the company. Redback's top resellers by revenue are Alcatel (NYSE: ALA; Paris: CGEP:PA), Nokia Corp. (NYSE: NOK), and Telindus Group NV (Euronext: Tel.BR).
Redback continues to lose money, but analysts believe the company has a good shot at reaching profitability by the end of 2005.
In its most recent earnings announcement, Redback reported a second-quarter loss of $7.2 million or 13 cents a share on revenues of $34.6 million. (See Redback Trims Losses.)
— Mark Sullivan, Reporter, Light Reading