An unlikely knight in shining armour, Gemfire Corp. has galloped up in the nick of time to save Avanex Corp.'s (Nasdaq: AVNX) passive components operations at its Livingston plant in Scotland, home of the former startup Kymata.

In an announcement late Friday, Gemfire said it has signed a definitive agreement to acquire all the assets of Avanex's planar lightwave circuit (PLC) business (see Gemfire to Buy Avanex PLC Unit).

Avanex's Fiber Bragg Gratings (FBGs) and thin-film filter products, also produced at the site, will probably be consolidated with its active components operations in France, although a final decision hasn't been made.

Gemfire will acquire all outstanding stock of the U.K. subsidiary of Avanex, and Avanex will take a minority equity interest in GC Holdings, the parent company of Gemfire. GC Holdings was created in mid-2003 as a way of allowing debt holders to convert debt into equity (and presumably to get Gemfire out of a financial hole).

What this means in practice is that Avanex will participate in a new funding round for Gemfire. The round, which is still open to new investors, is expected to total in the region of $10 million. It should be enough to see the company through to breakeven, according to Gemfire's CEO Rick Tompane.

In a statement, Walter Alessandrini, Avanex’s chairman and CEO, explained that Avanex had made a strategic decision to focus on other core technologies and spin out the PLC unit. “Our decision regarding the Livingston facility was made in the context of focusing our resources in optical subsystems. This agreement with Gemfire ensures that our customers’ requirements for planar waveguide technologies will continue to be supported.”

Avanex's Livingston facility has been working on borrowed time since the company announced in late November that the site would close unless a buyer could be found (see End of the Road for Kymata?). Under U.K. law, a "consultation period" of only 30 days was required before layoffs could be made. That period expired on December 25 [ed. note: what a jolly Christmas present].

Gemfire approached Avanex immediately, according to CEO, Rick Tompane. The two companies had been collaborating on the production of a Vmux (a multiplexer with integrated variable optical attenuators), a project that Gemfire didn't want to jeopardize. Gemfire was supplying its polymer VOA technology, and driver electronics; Avanex supplied the Arrayed Waveguide Gratings (AWGs). The acquisition will bring all the necessary expertise under one roof.

Bringing the silica expertise in-house seemed a particularly smart move in a climate where PLC companies are increasingly endangered, says Tompane. "The nice thing is that is was all done seamlessly without having to shut down operations."

For employees, the process will not be so seamless, however, as most will still lose their jobs. Out of 100, Gemfire plans to retain only 20 to 30. Technically, all layoffs will take place as planned, and then Gemfire will rehire the folk it wants to retain. "We didn't want them to lose out on the severance packages," says Tompane.

This is the third time the Kymata factory has changed hands in as many years. Following the sudden departure of founder and CEO Brendan Hyland in 2001, Kymata was sold to Alcatel SA (NYSE: ALA; Paris: CGEP:PA) for $119 million (see Kymata Sold for $119 Million). In July 2003 Alcatel sold its components group, of which Kymata was just a small part, to Avanex for stock worth about $63.5 million (see Avanex to Buy Alcatel, Corning Units).

— Pauline Rigby, Senior Editor, Light Reading