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Optical/IP

JDSU and SDL: Getting Closer

After months of review by the Department of Justice, analysts say a decision in the JDS Uniphase Inc. (Nasdaq: JDSU) and SDL Inc. (Nasdaq: SDLI) merger could be close at hand. Like the unending U.S. presidential election, most people feel as if they already know the outcome, but they are just waiting for the official tally.

The stock prices of the two companies have recently moved to shorten the spread between the proposed deal value and SDL’s stock price.

The agreement, which calls for trading 3.8 shares of JDSU for each share of SDLI, makes SDL worth $281 a share at JDSU's current value. SDL's stock was trading at around $270 a share, narrowing the spread between the proposed merger deal and its current value to about 4 percent. This is compared to a 21 percent difference on November 1st and 6 percent on December 1st.

UBS Warburg noted the shortening gap in a research advisory it distributed to investors earlier this week, reiterating its position that the deal will go through.

“When spreads tighten it often means that the deal is getting closer to completion,” says Joseph Wolf, research analyst for UBS Warburg and author of the recent report. “There are still regulatory issues concerning areas where they overlap, but I think there’s a minor probability that it won’t go through.”

Most analysts agree that the DOJ will give the green light for the merger, but they say it will probably come with strings attached. For one, JDSU might have to give up its 980-nanometer pump laser facility in Zurich, Switzerland, which is expected to generate about $275 million in sales for 2001, according to UBS Warburg (see JDSU and SDL: The Saga Continues). Combined, the companies garner 70 to 80 percent of the terrestrial 980nm pump laser market and close to 90 percent of the submarine market.

“Fundamentally, I’m sure they don’t want to part with the facility,” says Wolf. “But if you look at the direction of company, which is to get into the production of more highly integrated modules, then it makes sense for them to give this up for what they would get with SDL.”

Basically, JDSU has limited experience producing integrated laser modules, whereas SDL is very advanced in the field. And because customers are demanding more integrated modules for terrestrial applications and these parts often have a higher profit margin, it would make sense for JDSU to go through with the merger even if it means giving up a significant portion of its laser business, says Wolf.

Lucent Technologies Inc. (NYSE: LU), Nortel Networks Corp. (NYSE/Toronto: NT), Corning Inc. (NYSE: GLW), or Furukawa Electric Co. Ltd. are among those listed as potential buyers, with the plant predicted to sell for between $4 and $7 billion. A real bargain, according to the report, considering that Corning spent roughly $4 billion for Pirelli's optical components business, which is expected to have sales of only $80 million in 2001.

In recent months, JDSU has expressed its commitment to closing the deal. One analyst, who attended JDSU’s analyst day a few months back, said that Jay Abbe, COO of the company, said he would not rule out selling a portion of the business to get the deal approved.

JDSU customers seem to be warming up to the idea, too. For example, Nortel, which publicly voiced concern over the summer, has changed its position. At the Nortel analyst conference last month, CEO John Roth was asked about the merger and he said, "We're pretty much at peace with that."

The next logical question is: When will this thing actually happen? Analysts expect the DOJ to give its stamp of approval before December 27, when both companies’ shareholders vote on the merger. Bloomberg News is reporting that the DOJ could decide as soon as next week. But final approval will come from the shareholders.

-- Marguerite Reardon, senior editor, Light Reading, http://www.lightreading.com

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