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Nortel's Broadband Cable Play

Light Reading
News Analysis
Light Reading
10/20/2000

Nortel Networks Corp. (NYSE/Toronto: NT) sent a strong message of support for broadband cable access when it agreed this week to start a new, publicly traded company in that space.

Nortel and its cable business partner, Antec Corp. (Nasdaq: ANTC) announced the reorganization of their mutual interests in Arris Interactive, their joint venture that sells broadband cable access hardware and network design and integration services to carrier customers.

Terms of the deal call for Nortel to swap its 81.25 percent interest in Arris in return for $325 million and 33 million shares from partner Antec. A new company will be formed, temporarily named Arris Inc., dedicated, as is the present one, to serving the broadband cable access market. (A new name will be chosen later on.) Nortel will own 46.5 percent of this company, and Antec and its shareholders, including broadband content broker Liberty Media Corp. (NYSE: LMG.A, LMG.B), will own the rest.

A proxy statement giving pro forma earnings and guidance for investors is due out for the new company sometime next week, Antec and Nortel executives said.

The announcement is significant in a couple of ways. First, this project is Nortel's main effort to address the growing market for broadband cable access. "This is where we are focusing our efforts toward last-mile, IP, data-only access," says Dan Middleton, Nortel VP. Nortel plans to make money by reselling a slew of products through Arris, including optical networking gear, access equipment, IP services products, and management software.

Nortel's goal, Middleton says, is to get a generous slice of a market it thinks will double by 2004, when he says there will be more than 20 million residential and business cable lines in the U.S. Cable access, he contends, will outstrip DSL as a broadband access medium by a ratio of four to one over the next four years.

Nortel isn't alone in seeking out this market. Last month, ADC Telecommunications Inc. (Nasdaq: ADCT) announced it would pay $2.5 billion to purchase privately held Broadband Access Systems, which makes gear to deliver IP services over broadband cable TV networks. ADC spokespeople say cable access, including conversion of hybrid fiber coax for residential delivery of broadband services, will account for 40 percent of the burgeoning access market over the next four years.

Another aspect of Nortel's announcement is its value to investors. Analysts seem to agree that it gives Antec shareholders a chance to do better. This last quarter, Antec reported a 25.9 percent decline in earnings per share, despite quarterly revenues of $274.6 million, up 15.8 percent from the same time last year. Merging with Arris can only help, analysts say. Arris financials are stronger, and the company holds a 70 percent share of the $293 million cable telephony market, according to Nortel and Antec.

"Basically, as an ANTC shareholder you are giving up a portion of the company for a 54% stake in a better company positioned for long-term growth," wrote James Jungjohann, analyst for CIBC World Markets in a research note.

Others concur. "Previously, Antec's revenues were hidden in Nortel's financials," says Ron Westfall, senior analyst at Current Analysis. The arrangement, he says, caused some of Antec's earnings to be buried deep inside Nortel's ledgers and helped fuel Antec's poor fourth-quarter financials. By merging into Arris, Westfall says, Antec will be able to tell a somewhat better tale financially.

On the downside, analysts like Jungjohann and Westfall are still concerned about the reasons for Antec's recent poor sales record. One of those reasons, according to Antec, was the worldwide fiber shortage, which execs said made it tough to fill integration orders. The shortage shows no chance of letting up, and the problem could haunt the new company.

Sources also say some carriers have complained about some aspects of Arris's product line. "Performance and scaling are concerns," says Westfall.

Still, Westfall seems optimistic. "Nortel and Arris aren't sitting on their hands," he says. New products are in the pipeline. And the new company stands to benefit from the sheer breadth of different types of products it can offer, thanks to its pedigree. "Only Cisco has a comparable across-the-board offering," he says.

-- Mary Jander, senior editor, Light Reading http://www.lightreading.com

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