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Optical/IP

Avanex Deal Reshapes Sector

Shares of Avanex Corp. (Nasdaq: AVNX) more than doubled Tuesday after the company announced two major-league photonics acquisitions (see Avanex to Buy Alcatel, Corning Units).

After announcing plans to purchase the optical components businesses of Alcatel SA (NYSE: ALA; Paris: CGEP:PA) and Corning Inc. (NYSE: GLW) on Monday, Avanex's stock rose $1.74 to $2.93. But late today, the stock was down 22 cents.

The reason seems clear: Avanex has taken the last good spot available in the optical components sector.

Analysts and industry executives agree that a broad product line will be required for success once the segment recovers (date unclear). The fastest way to get a broad product line is through acquisition, and the Alcatel and Corning units were the last sizable components units up for sale.

In previous deals, Bookham Technology plc (Nasdaq: BKHM; London: BHM) and TriQuint Semiconductor Inc. (Nasdaq: TQNT) acquired the components groups of Nortel Networks Corp. (NYSE/Toronto: NT) and Agere Systems (NYSE: AGR.A), respectively (see Bookham Buys Nortel's Components Biz and TriQuint to Acquire Agere's Optics).

The consolidation resulting from Avanex's deal should be good for all survivors.

"Competition-wise, Avanex is offering something that would represent more competition than three separate companies," says Pat Chiefalo, analyst with Merrill Lynch & Co. Inc.. "On the other hand, the fact that you're having a less fragmented industry overall means you have better industry characteristics. Pricing competition is not as bad, and rational pricing is good overall for the industry."

The resulting landscape has JDS Uniphase Corp. (Nasdaq: JDSU; Toronto: JDU) at the top, with Avanex and Bookham duking it out for second place. "That's a good battle," Chiefalo says.

Avanex does still have to finish its whale-swallowing act to make the deal successful, though. In addition to its own restructuring, the company has to navigate some cuts in the Alcatel business as well as integrate the Alcatel operations and Corning assets into its own fold -- not the kind of chore that gets done in a day or two.

"You're looking at a year or two years out before you start to see inroads into the industry," Chiefalo says.

After the Avanex deal was announced, other photonic component stocks rose, too: New Focus Inc. (Nasdaq: NUFO) rose 6 cents to $3.49; Oplink Communications Inc. (Nasdaq: OPLK) climbed 10 cents to $1.20; and shares of JDSU rose 4 cents to $3.41. But many of those gains were given back in trading today.

— Craig Matsumoto, Senior Editor, Light Reading
whyiswhy 12/5/2012 | 12:03:56 AM
re: Avanex Deal Reshapes Sector Alcatel and Corning

Threw their trash,
payed some cash,
made a dash.

-Why
Jet 12/5/2012 | 12:03:55 AM
re: Avanex Deal Reshapes Sector I have to agree with Pat Chiefalo, analyst with Merril, basic economies of scale via specialization by market segment - healthy for these companies, healthy for the industry

Downside of course is continued sector layoffs until recovery is established

I believe sideline cash once it gets even a hint of a recovery in optics sector - will bid these optics stocks up quite dramatically, at least those having strong balance sheets. It won't be like 98 thru 2000, but it should bring them out of these absurdly low valuation levels
BobbyMax 12/5/2012 | 12:03:53 AM
re: Avanex Deal Reshapes Sector Regardless stock doubling or tripling, there are a lot of problems that Avanex faces. It does not have any management or R&D experiece relative to the business unts of Alcatel and Corning. Since the prices of optical components brcause of lack of demand, Avanex would be able to pay a workforce of 1,400 personnel. The distance of the acquired of business units also present a severe problem.

Avanex does not have wide enough market for its own products, consequently it will be difficult to enhance the market share with products fron Alcatel and Corning. It may also have difficulty meeting thecomponent needs of Alcatel.
Peter Heywood 12/5/2012 | 12:03:50 AM
re: Avanex Deal Reshapes Sector Isn't this more of a merger than a takeover? Alcatel and Corning end up owning a big chunk of Avanex, don't they?
dodo 12/5/2012 | 12:03:48 AM
re: Avanex Deal Reshapes Sector Peter

It would be interesting to see for how long Corning will hang on to its shares. James Houghton wants Corning to be profitable and the telecomm experience has left a bad taste.
(I even doubt whether Alcatel will stick around though they may play that to their advantage with 28 % stake- has access to the new devices if and when they are required)

Any way it all depends on when the market will pick up.
Soup 12/5/2012 | 12:03:43 AM
re: Avanex Deal Reshapes Sector Hey, all I have to say is "Cha-ching!"

Any movement that is not just more lay-offs seems to be a good thing for my telecom portfolio. We all know consolidation is a must for recovery, so I see this (whether it was stupid or smart for the participants) as a beneficial thing overall.

Besides, now I can buy that big screen HDTV.

Soup.
whyiswhy 12/5/2012 | 12:03:16 AM
re: Avanex Deal Reshapes Sector Peter, did somebody shout merde(r)?

It's a dump of unwanted assets on a company desperate to keep from being de-listed. SO desperate, they screwed up their runway significantly.

Alcatel corporate has thought badly of Alcatel optronics for years, but was forced to buy from them, pay over-market, and get under-performing components.

Dittos for GLW wrt their amplifier group, and double so wrt Lasertron: their not even going with asset-wise or people-wise.

Now, in spite of their announcement, I would bet 100:1 the loopholes in the ALA supply agreement are wide enough to allow ALA to buy from the lowest cost supplier, whomever that is.

Avanex is going to have to pull off some amazing downsizing moves, and just as amazing accounting tricks to compete. They don't have the management horsepower to pull it off.

But that's JMHO

-Why

PS: Meant to say paid...how about a preview button with a spell check? But we would then miss those amusing Boobos Maximos :-)

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