AFC Chief Says Sale Makes Sense
John Schofield, CEO of AFC, spoke with Morgan Keegan analyst Simon Leopold about why a sale might make sense, though he didn’t specifically mention a buyer or a price. “He did not say the company is for sale,” Leopold says. “He went through the logic of how, if the company had greater resources and scale, that could deliver greater shareholder value.”
After meeting with Schofield, Leopold was left with the impression that supporting regional Bell operating company (RBOC) customers like Verizon Communications Inc. (NYSE: VZ) and SBC Communications Inc. (NYSE: SBC) proved more challenging than AFC had anticipated. “It sounds like their sales and support staffs are stretched pretty thin,” he says. “So, the idea of matching up with a company that has those sorts of resources makes sense.”
Tellabs seems like the best suitor possible to Leopold because of its strong relationships with Baby Bells. Steve McCarthy, senior executive VP at Tellabs, two weeks ago told investors at the J.P. Morgan Technology & Telecom Conference in San Francisco that his company is considering entering the fiber-to-the-premises (FTTP) market through acquisitions, though he did not mention target companies. (AFC makes FTTP equipment.) “Certainly Tellabs management’s comment about getting into the access space and more generically consumer broadband leads me to see this pairing as more likely,” Leopold says.
At the conference, McCarthy highlighted FTTP as one of several adjacent markets into which Tellabs would like to expand. “Likely we’ll see some key investment activity internal and external,” he said. “We intend to study carefully and make some decisions in the not too distant future.” The decision on FTTP will hinge on whether Tellabs believes it can develop a product internally in time to seize on increasing demand for FTTP equipment. If not, it will acquire a product externally.
Of all the RBOCs, Verizon has made the boldest commitment to FTTP so far, saying it plans to deploy the technology to 1 million homes this year. No other Bell has made such a statement. “That suggests that the decision is individual to each customer, and we have some time,” McCarthy said. However, Verizon has awarded its FTTP equipment contract to AFC (see AFC Finalizes Verizon FTTP Contract). Therefore, Tellabs won’t get any of that business by developing a product. “We’d have to get it through some other means,” McCarthy cryptically observed.
Although Leopold believes AFC is struggling to support RBOC customers, he did not get the impression from speaking with Schofield that the vendor is falling behind on Verizon’s FTTP deployment. “We left with a higher confidence that the June FTTP rollout with Verizon will occur on schedule,” Leopold wrote in his note.
Doubts about the Verizon deployment have weighed on AFC’s stock price, which has dropped from a high of $27.50 to a $15.50 in the past three months, giving it a market capitalization of $1.4 billion. Tellabs has $1.2 billion in cash, and therefore a bid for AFC would likely consist of cash and stock. Tellabs and AFC were not immediately available for comment.
— Justin Hibbard, Senior Editor, Light Reading