Honey, I Shrunk the Price
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