Lucent Cuts Deal on Fiber Unit
Early today, Japan's Furukawa Electric Co. Ltd. announced it would offer $2.3 billion instead of $2.5 billion for Lucent's Optical Fiber Solutions (OFS) business headquartered in Norcross, Ga. The deal closed this afternoon (see Lucent Closes Fiber Sales).
The price reduction includes a 13 percent increase in the offer from Furukawa and a 69 percent cut in the amount to be fronted by Furukawa's partner in the deal, coaxial cable maker CommScope Inc. (NYSE: CTV).
According to Lucent, the third player in the original contract, Corning Inc. (NYSE: GLW), is still on track to spend $225 million in cash for Lucent's portion of two joint ventures in China -- Lucent Technologies Shanghai Fiber Optic Co. Ltd. and Lucent Technologies Beijing Fiber Optic Cable Co. Ltd.
"That part of the transaction will probably close by the end of the year or early 2002," a Lucent spokesperson said.
All parties involved blame the severe downturn in the worldwide fiber market for the loss of value in the deal. Indeed, Corning, which dominates the market with roughly a 30 percent share of worldwide optical fiber production, conceded last month that pricing pressure worldwide was a key factor in its latest financial disappointments, layoff, and plant idling (see Corning Cuts Again and Corning Slams on the Brakes).
CommScope pledged $650 million to Furukawa's $1.875 billion in the original offer. The deal would have given CommScope a 51 percent stake in the venture with Furukawa. But late in October, CommScope indicated it planned to restructure the deal -- "[g]iven the uncertain economic environment and severe downturn in the telecommunications market as well as associated difficulties in the financing markets following the September 11th tragedy."
Now, CommScope has moved from joint venture to minority interest player, pledging $203 million for roughly an 18 percent stake. But not all of this money will be seen in the immediate transaction. CommScope is taking "an interest-bearing note of the venture for $30 million to finance a portion of the initial working capital needs until permanent financing of the venture is secured." This brings down its contribution to $173 million.
Meanwhile, Furukawa has increased the amount of its payment to $2.127 billion.
Furukawa plans to create two organizations from the acquisition of OFS: OFS Fitel and OFS Brightwave. CommScope's donating an executive: Eddie Edwards, an ex-president of Radio Frequency Systems at Alcatel SA (NYSE: ALA; Paris: CGEP:PA), who joined the company in June 2001 as executive VP of its Wireless Products Group, will become CEO of the two groups.
There is no word about other leadership plans. And, according to a Reuters report, Furukawa's president Junnosuke Furukawa told reporters in Tokyo early this morning that more than 45 percent of the 6,000-odd employees now at OFS may be laid off during the takeover.
Wall Street seems pleased that the move is going ahead, albeit at a lower level of profitability for Lucent. "Given the deterioration in the fiber market since the Lucent-Furukawa deal was announced, the reduction in price for the Lucent business is relatively mild. The completion of the deal is a net positive for Lucent, in our view," says David A. Jackson of Morgan Stanley Dean Witter & Co.
But there are reservations too. Both Furukawa and CommScope are borrowing some portion of the money to complete the venture. And Lucent is getting far less than it originally hoped. Some also worry that Lucent will wind up getting stuck with still more costs before the deal closes.
"We remain concerned about additional cash restructuring costs that Lucent may incur in order to complete the deal," wrote analysts at CIBC World Markets in a note yesterday. CIBC also is counseling CommScope in the deal and refused to comment further.
Some analysts say it's not a great deal for CommScope. "Certainly, they're adding optical capacity at a pretty reasonable price," says Clint Kuboyama of Value Line Inc.. But he says it's difficult for him to see the immediate payback for CommScope in adding so much capacity, given the amount of fiber already installed at customer sites.
At press time, CommScope shares were trading at $8.68, up 0.01 (0.12%). Lucent shares were trading at $8.12, up 0.40 (5.18%). Corning shares were trading at $9.58, up 0.58 (6.44%).
— Mary Jander, Senior Editor, Light Reading