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AFC Chief Says Sale Makes Sense

If we're crying wolf, we’re not crying alone. Investment bank Morgan Keegan & Company Inc. today issued a research note saying that a sale of Advanced Fibre Communications Inc. (AFC) (Nasdaq: AFCI) is likelier than it had thought and that Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA) is the most probable acquirer. The note echoes similar reports first published by Light Reading in January (see Tellabs Angling for Access – and AFC and Talk of AFC Deal Is Back ).

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

wass 12/5/2012 | 1:46:19 AM
re: AFC Chief Says Sale Makes Sense I personally don't buy into the lack of RBOC support argument. AFC has been selling DLC equipment to RBOCs for awhile now.

jes 12/5/2012 | 1:46:27 AM
re: AFC Chief Says Sale Makes Sense
The one thing that AFC badly needs is the support (may end up being aquired ??) of a big vendor company in dealing with the RBOCs. And defenitely once a deal like AFC-Tellabs comes through, the united entity will be a major palyer in the access arena. The one company who really looks on this will be Alcatel. Alcatel, Beware !!!!

Truelight1 12/5/2012 | 1:46:34 AM
re: AFC Chief Says Sale Makes Sense John wants perhaps because he is encountering product delays in the FTTP program and looking for a personnal exit strategy ?

Good stock movement tho. What would the price be fgiven Tellabs(3.6B)and AFC(1.4B) current valuations.

The merger would provide no synergy to either company. It would cause suffecient grief and turmoil to many employees. The Executives would then have 9-12 months of churn to justify the merger and then all said and done acknowledge that it was not the best to do in the first place.

Silly


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