Tellabs & AFC: Together at Last!
The announcement follows a vote in favor of the deal by a majority of AFC's shareholders, who will each get $12 and 0.504 Tellabs shares for each AFC share. Tellabs issued about 74.6 million shares of common stock to AFC shareholders.
Tellabs shares were worth $8.55 at the close of play Tuesday. When the acquisition was first announced on May 20 this year, the Tellabs share price crashed by 13 percent to $7.95 from $9.19 (see Tellabs Buys AFC for $1.9 Billion).
Share prices weren't the only thing headed south, however. Following the initial announcement in May, AFC suffered setbacks in its key FTTP deal with Verizon Communications Inc. (NYSE: VZ). (See Tellabs/AFC: The Ever-Shrinking Deal?, Tellabs Calm Over AFC Hiccup, and Is the Tellabs-AFC Deal in Danger?.)
As a result of that turmoil, and AFC's second-quarter results (see AFC Reports Q2 Results), Tellabs renegotiated the deal in September, and the value dropped by $400 million from $1.9 billion to $1.5 billion (see Honey, I Shrunk the Price).
More negative news followed later that month, as Verizon announced it was adding a second source for its FTTP technology (see Rough Week for AFC). Since then, though, Verizon has said it is ahead of schedule in FTTP deployments and the equipment kinks have been worked out.
Analysts don't especially like the looks of the Tellabs/AFC combo. On Monday, Smith Barney reduced its rating on Tellabs to Hold from Buy, as it expects the deal to be "slightly dilutive."
And today Jefferies & Co. analyst George Notter lowered his rating on Tellabs from Hold to Underperform. In a research note, Notter describes the new earnings forecasts for the new, combined company as unattractive.
For 2004 and 2005, his earnings per share (EPS) projections for Tellabs/AFC are 38 cents and 30 cents respectively, compared with 39 cents and 40 cents for Tellabs alone. "Hence, we believe that the AFC deal will be 25% dilutive next year." He adds: "Our newly initiated '06 EPS number is $0.20 for the combined company."
Basically, Notter doesn't believe AFC stands much chance of winning much, if any, business from the coming fiber buildout at BellSouth Corp. (NYSE: BLS), and that has hurt revenue forecasts (see Analyst: Copper Is BellSouth's Gold).
So what happens now? Well, some senior AFC executives could make their bank managers very happy, especially former CEO John Schofield, who looks set to trouser at least $4 million after deciding not to join Tellabs (see Merger Could Reward AFC's Schofield and AFC's Golden Parachutes).
Last week AFC director Frank Ianna was nominated to the Tellabs board instead of Schofield, who "determined to not join the Tellabs board due to family reasons," according to an AFC filing with the SEC (see AFC, Tellabs Nominate Director).
There's also a question mark over the future of AFC's CTO Jim Sackman. In what looks like a demotion, Sackman will report to new appointment Carl DeWilde, former CTO at optical systems vendor Xtera Communications Inc., who joins as "executive vice president-access products, with global responsibility for developing access products in the AFC portfolio."
The other new appointments to the Tellabs executive team are Jeff Rosen, AFC's VP of operations and customer service, who is now executive VP of operations at Tellabs, and AFC's VP of administrative services, Victoria Perrault, who joins as executive VP of human resources.
— Ray Le Maistre, International News Editor, Light Reading