Optical/IP Networks

Tellabs Angling for Access – and AFC

No, it’s not your imagination, the deal-making is heating up. And the latest word from our best sources on Wall Street is that Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA) has been angling for an acquisition of a big access player -- specifically, Advanced Fibre Communications Inc. (AFC) (Nasdaq: AFCI).

One trusted source says he’s even heard about a term sheet being drawn up. He said Tellabs was ready to pull the trigger when AFC’s own deal for Marconi Corp. plc's (Nasdaq: MRCIY; London: MONI) access division got in the way, two weeks ago (see Access Acquisition Boosts AFC). That put the deal on hold. Yesterday's announcement of the resignation of North American president Ed Kennedy probably has not helped move things along (see No Naperville for Kennedy).

Another stumbling block could be the price. AFC shares have risen 25 percent in just the last month. Today, AFC rose $0.99 (4.18%) to $24.58.

Will it still happen? One source thinks it just might. And other sources, including Tellabs executives themselves, have confirmed that Tellabs would like to add another big product line -- especially something hot like access.

Tellabs would like to diversify from its core business, which includes mostly Sonet/SDH gear and some newer packet-switching products that it is developing via its aquisition of Vivace Networks (see Tellabs Unveils Vivace Sibling and Tellabs Snags Vivace for $135M). Buying an established access company with blue-chip telecom customers would suit Tellabs well -- and AFC, which is one of the leading access players in North America along with Alcatel SA (NYSE: ALA; Paris: CGEP:PA), fits the bill.

Tellabs chairman and CEO Michael Birck told Light Reading today that the company has been looking at options, though he wouldn't comment on whether a specific acquistion was in the works.

”We have a group that’s been looking [for another product group]. We have not limited the search to one area, including access, but we have noticed there’s a lot of money flowing there," said Birck.

Wow. What about AFC?

”Yes, we know them,” said Birck. “And we probably couldn’t acquire Alcatel. But there are others."

So, if Tellabs did pull the trigger, what would be the price? Our source says AFC would likely want a decent premium -- though as mentioned earlier it’s been getting steadily higher every day, and that may cause a problem. AFC currently has a market capitalization of $2.12 billion. Yes, that’s billion. Sounds like the old days, don't it?

An AFC spokesman said the company had no comment on this story. But he did mention that he would not want to move to Naperville, Illinois.

— R. Scott Raynovich, US Editor, Light Reading

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