Honey, I Shrunk the Price

Pity the shareholders of Advanced Fibre Communications Inc. (AFC) (Nasdaq: AFCI) this morning. Collectively they've just seen about $400 million fly out of the window.

Following a turbulent past few months for the access equipment company, its suitor, Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA), has renegotiated its deal to acquire AFC, and is now set to pay a total of $1.5 billion instead of $1.9 billion (see AFC/Tellabs Deal Gets Smaller and Tellabs Buys AFC for $1.9 Billion).

That shrinkage looked likely, and now it's happened (see Tellabs/AFC: The Ever-Shrinking Deal?).

AFC shareholders must be praying it won't drop any further, as this is a deal that, when Tellabs initially proposed an all-stock purchase, was worth as much as $2.17 billion.

The latest revised terms were released after the market closed yesterday, and sent Tellabs's share price soaring in early morning trading today. It is up 86 cents, more than 9 percent, to $9.98.

AFC's stock went the same way as its acquisition price -- down. It crashed by 81 cents this morning, nearly 5 percent, to $16.39.

Here's what's different, apart from the deal's sliding value: AFC's shareholders get more cash than before. The original deal in May involved 1.55 Tellabs shares and $7 in cash for each AFC share. But then AFC reported its second quarter financials and suffered a setback in its key FTTP deal with Verizon Communications Inc. (NYSE: VZ), and the Tellabs board requested a review of the deal (see Tellabs Calm Over AFC Hiccup). Now one AFC share is being swapped for 0.504 of a Tellabs share and $12 cash.

That means the $1.5 billion comprises $1.06 billion in cash, and the balance in stock. Of that cash, $600 million will come from AFC's reserves, and $460 million from Tellabs's bank balance.

"We were advised by our bankers on the new valuation having evaluated current market conditions," said Tellabs CEO Krish Prabhu in a conference call this morning. "We looked at AFC's cash, its run rate business that has lots of customers providing stable profitability, and the strategic FTTP business. We're confident this is the right deal."

"The revision makes sense for AFC shareholders," said AFC CEO John Schofield, who stands to profit immensely (see AFC's Golden Parachutes). "The new agreement increases the likelihood that the merger will be completed. There were some very tough negotiations, and we did a lot of detailed analysis, and decided this was the best course of action," Schofield said.

But there are no cast iron guarantees that the deal will not be revised further, or that it will be completed at all, though Prabhu said, "We've been working on this for 18 months, and having amended the deal we're looking to close it quickly."

With approval required from AFC shareholders and the Securities and Exchange Commission (SEC), it won't be completed this month, but Prabhu hopes to sign it off in October. The amendment does not have to be approved by Tellabs shareholders.

However, a further review and amendment would be sought if there was to be any "material adverse change" on either side, though exactly what constitutes such a change is unclear, even to Prabhu. The lawyers would know, he said.

And it's even possible that a "significant material adverse change" could see the whole deal called off, admitted the Tellabs CEO, though he was quick to add: "We want to merge quickly and get on with executing to Verizon's contentment."

The sensitive nature of AFC's FTTP equipment deal with Verizon was also the subject of many analyst questions. But AFC chief Schofield wasn't revealing much on the current status of the contract following his company's breach of contract at the RBOC. "We're working to resolve the issues we have at Verizon and doing all we can to meet their needs as they roll out FTTP very aggressively," he said. "We're on track to meet the next development milestone."

— Ray Le Maistre, International News Editor, Light Reading

Accelerated Photon 12/5/2012 | 1:18:02 AM
re: Honey, I Shrunk the Price Is the price reduction related to their FTTP product that doesn't work?
AFC had only 1 U.S. customer that had deployed their product and they are removing the system from their network and replacing it with a system from Optical Solutions Inc.
It's too bad Verizon doesn't follow and deploy a fully functional and field tested product rather then struggling with the cheaper non-working/non-tested system.
paolo.franzoi 12/5/2012 | 1:18:01 AM
re: Honey, I Shrunk the Price
I guess you missed the thread posted by a Verizon customer who loved the service delivered by the AFC product.

douggreen 12/5/2012 | 1:18:01 AM
re: Honey, I Shrunk the Price This looks strangely similar to the attempted (and failed) merger between Tellabs and Ciena back in 1998. The merger was re-priced, then cancelled after AT&T suspended trials of Cienas DWDM system (in favor of a Lucent system that did not yet exist, but that's another story).

What's different now? Tellabs had a history of consistant revenues and profit growth, and Ciena introduced a level of uncertainty that they were not willing to tolerate, even at a very attractive price. Today, their own reveunes are not quite as stable. They need growth from somewhere.
jackall 12/5/2012 | 1:18:00 AM
re: Honey, I Shrunk the Price
Maybe Verizon should have their executives stop making deals on the golf course and get some technical folks involved.
Sibylle 12/5/2012 | 1:18:00 AM
re: Honey, I Shrunk the Price It would be interesting to find out if Schofield too had to take a proportionate cut in his takeaway. His stock/option portion is obviously reduced but I suspect his new employment/retainment/severance agreement will more than compensate for the loss.

Shed some light...lightreading.
Sibylle 12/5/2012 | 1:18:00 AM
re: Honey, I Shrunk the Price Its 400 Meg!
Fix that will ya ?

also..i told you so...
mtnbikey 12/5/2012 | 1:17:55 AM
re: Honey, I Shrunk the Price The test in Keller is actually working quite well and Verizon is quite pleased. My guess is that you work for the competition....
jayja 12/5/2012 | 1:17:42 AM
re: Honey, I Shrunk the Price Yeaahhh.. Right.
dqueen 12/5/2012 | 1:17:07 AM
re: Honey, I Shrunk the Price Spread in TLAB-AFCI merger has gone from $0.80 to $2.00 in a few days. The market is clearly nervous about the deal getting done, despite TLAB publicly stating at an investor conf last week that they know how AFC's Sept qtr is going (TLAB wouldn't state if AFC's qtr is going well or not, but my take is that it's not), and that even if AFC comes in a bit short of Wall St expectations as they did in Mar & Sept, the deal is still on. TLAB not interested in negotiating another 5-10% off current deal price... they just want to get it done... anyone know anything different?
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