Access Acquisition Boosts AFC

Advanced Fibre Communications Inc. (AFC) (Nasdaq: AFCI) announced yesterday it would buy Marconi Corp. plc's (Nasdaq: MRCIY; London: MONI) North American Access (NAA) business unit for about $240 million in cash (see AFC to Buy Marconi NA Access Biz). The purchase gives AFC a viable fiber-to-the-curb (FTTC) product and an important customer in BellSouth Corp. (NYSE: BLS), which accounts for more than half of NAA's business.

The purchase works out well for both Marconi and AFC (see ... And Helps Marconi Cut Its Debt). AFC says the deal will make money for the company immediately: NAA brought in $163 million in revenues during the past 12 months and recently became profitable, according to the companies. AFC expects the deal to close in the first quarter of 2004.

Investors seemed excited about the acquisition, as news of the deal helped boost AFC's stock $2.04 (10.23 percent) to $21.99 in midday trading. This was doubly surprising, considering that the stock prices of acquirers usually go down when a deal is announced.

So what's to be excited about? The deal helps beef up AFC's growing position in the access market. AFC claimed one of the most significant fiber access wins last year when it won Verizon Communications Inc.'s (NYSE: VZ) FTTP business. It has been trying to win more business at larger incumbent accounts (see How Big Is FTTP for AFC? , AFC Comes Clean on FTTP ).

Marconi's DISC*S MX will help with that. It's a standards-based FTTC product that allows service providers to transmit video over cable, which was a key capability for the BellSouth deal. Marconi's NAA division also shipped the DISC*S, a digital loop carrier (DLC), but that may overlap with AFC's own DLC product.

"I think this acquisition is driven by the FTTC technology gain and the BellSouth installed base gain," says Graham Beniston, analyst with Heavy Reading, Light Reading's research division. "But AFC will clearly want to wean BellSouth onto their DLC going forward."

The DISC*S MX's design was largely driven by BellSouth's requirements, so it makes sense that AFC would want that product. It's a standards-based FTTC system with POTS + ADSL to GR-909 and a G.983 PON capability. Heavy Reading's November report, "Next-Generation DSL Equipment: The Path to Profitability," describes the video component of the product as a hybrid fiber/coax (HFC) system, in which video is sent downstream in analog form using the 1550nm wavelength band, while voice and data are sent in the 1310nm band.

There has also been recent interest in the DISC*S MX product from Europe, including a British Telecommunications plc (BT) (NYSE: BTY; London: BTA) FTTC request for information (RFI), Beniston's report says.

Marconi's DISC*S system was introduced in 1988 by Reltec, and bought by Marconi in 1999. Heavy Reading reports that the DISC*S is an ATM-based broadband NGDLC that can house 672 lines in a seven-foot rack, with up to 50 percent being ADSL. AFC is a more dominant DLC player in North America; its products include the UMC 1000 and the lower-density, higher-bandwidth DMAX 1120 (see New DSL Network Architectures).

AFC also says it will keep all of NAA's roughly 250 employees in Texas, and it won't assume any debt or pension-related expenses due to the purchase.

Even with the overlap in the DLC lines, AFC executives aren't saying if the product lineup will be reconfigured. AFC chairman, president, and CEO John Schofield says that AFC will continue development on both companies' products and will probably develop a future product that incorporates features from both systems.

AFC and Marconi/Reltec do have another common link: litigation. Between 1998 and 2000, AFC accused Reltec of stealing its technology through a Taiwanese reseller. The case was settled in February 2000: Marconi had to pay AFC $32.75 million in cash and agree to distribute its UMC 1000 product family. That agreement guaranteed AFC an undisclosed amount of minimum purchases or payments over three years.

AFC has tried to sell an FTTC product before. Its ONX1024 was the 24-channel optical network unit (ONU). AFC didn't sell many of them and cancelled the product more than two years ago, though it still builds a 48-line version of the product, according to AFC chief technology officer Jim Sackman.

In addition to BellSouth, Marconi's access division also does a small bit of business with Sprint Corp. (NYSE: FON), Grande Communications, and CenturyTel Inc. (NYSE: CTL), which are already AFC customers.

AFC's main fiber access rival in North America is Alcatel SA (NYSE: ALA; Paris: CGEP:PA), which recently won SBC Communications Inc.'s (NYSE: SBC) FTTP business (see SBC Picks Alcatel for FTTP). Interestingly, of the RBOCs involved in the big FTTP RFP last year, BellSouth is the lone holdout in declaring who'll get its business.

— Phil Harvey, Senior Editor, Light Reading