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Optical/IP

Did Furukawa Buy a Lucent Lemon?

When Furukawa Electric Co. Ltd. bought the Optical Fiber Solutions (OFS) group from Lucent Technologies Inc. (NYSE: LU) last November, it anticipated some fallout from the downturn in fiber sales. It didn't count on its North American acquisition dragging down the company's financials.

Sadly, that's what's happened, according to a recent report from Morgan Stanley Dean Witter & Co., titled "OFS is a Greater Burden Than Expected."

"The company is to drop into the red in the second half [of fiscal 2001]... About half of the ¥14.4 billion [US$111 million] downward revision to recurring profit comes from OFS," writes analyst Toru Nagai in the note.

Over the one and a half months OFS has contributed to the Furukawa financials, it's posted a ¥10 billion loss (about US$77 million). The impact on Furukawa is clear: The company has put out warnings of significant operating losses for 2002 and 2003.

While maintaining its Neutral rating on the stock, Morgan Stanley is revising its fiscal 2002 estimates to an operating loss of ¥46 billion (about $US356 million), down from its original expectations of an ¥11 billion loss (about US$85 million).

"On an annualized basis, we project a loss for OFS in fiscal 2001 of ¥80 billion [US$618 million]," writes Nagai.

Losses like these weren't in the plan when Furukawa bought OFS for over US$2 billion last November (see Lucent Cuts Deal on Fiber Unit). Ironically, Furukawa upped the price it paid in order to accommodate a lower percentage kicked in by partner CommScope Inc. (NYSE: CTV), which wound up taking an 18 percent stake (worth roughly $203 million) in the joint venture. Furukawa's final contribution was about $2.127 billion.

That was just prior to what turned out to be one of the worst quarters ever for the fiber industry. Indeed, sales of fiber and cable by market leader Corning Inc. (NYSE: GLW) were slashed toward the end of fiscal 2001 (see Corning: 'We've Hit Bottom').

Like Corning, Furukawa says the optical fiber cable business is down and shows no sign of recovery, according to Morgan Stanley. To get back in the black, Morgan says Furukawa plans to cut headcount at OFS by another 700 employees, bringing the total census to 3,700 by the end of this month.

These figures actually tally with its original plans for OFS: Furukawa stated it would cut up to 45 percent of the 6,000-odd workforce OFS had last fall.

What's the verdict? Morgan isn't all negative: "OFS is clearly a burden at the moment, [but] the intellectual property and international standards it gives Furukawa make the company the only domestic firm able to compete in the global market," Nagai writes. "We believe that after the share price adjusts on the negative news, its attractivenesss to long-term investors will be enhanced."

For its part, OFS continues to chug along, announcing partnerships and sales (see OFS and LuxN Commercialize 1400nm). Like Corning, the company anticipates growth in the metro market to help things pick up, but it can't predict when that will happen.

Interestingly, Corning itself is still on track to buy Lucent's part of two fiber optic joint-venture companies in China for roughly $225 million. A Lucent spokesperson says the deal should close by early in Lucent's next quarter (April or May 2002). Chinese government approval appears to have held things up.

— Mary Jander, Senior Editor, Light Reading
http://www.lightreading.com
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