Who Gets a JDSU Jewel?
Component companies are anxiously awaiting the Department of Justice’s ruling on the proposed JDS Uniphase Inc. (Nasdaq: JDSU) and SDL Inc. (Nasdaq: SDLI) megamerger, which is expected to be completed in the next couple of weeks.
Questions have shifted away from will the deal go through and when will it happen to: Who will buy the coveted Zurich plant that the DOJ is expected to ask JDSU to sell as part of its approval (see JDSU and SDL: Getting Closer)?
Corning Inc. (NYSE: GLW), Nortel Networks Corp. (NYSE/Toronto: NT), Lucent Technologies Inc. (NYSE: LU), Alcatel SA (NYSE: ALA: Paris: CGEP:PA), and Furukawa Electric Co. Ltd. are all likely buyers of the facility that manufacturers 980-nanometer pump laser chips.
There are about 12 companies that sell 980nm chip lasers, according to a Bear Stearns arbitrage report released this summer (see JDSU and SDL: The Saga Continues). But JDSU and SDL together have about 80 percent market share.
Because these chips are key to building WDM (wavelength-division multiplexing) systems, each one of these vendors could use it. With the supply chain for components constrained, it would make sense for any them to have the manufacturing in-house, says Mark Langley, director and senior analyst at Epoch Partners. “There’s no question that they all would want this asset,” says Joseph Wolf, research analyst for UBS Warburg. “It’s more a matter of how much anybody is willing to pay for it and who can afford it.”
Furukawa, which already is a leading supplier of 1480nm chips, is the most likely candidate. The Japanese component company owns 11.1 percent of JDSU, making its stake in the company worth about $7 billion. If the plant sells for a price between $4 and $7 billion as predicted, Furukawa could likely cover the whole deal with its JDSU stock.
“Depending on the market conditions, Furukawa has the advantage because it has the JDSU stock,” says Wolf. “But that value can fluctuate.”
Another strong contender is Corning, which has publicly stated that it would be interested in acquiring the 980nm facility. Corning has already shown an ability to raise cash in the face of a weak market. The company agreed to buy Pirelli for $3.9 billion in September, even though its stock prices were falling. But this deal could be too expensive for Corning’s liking.
“Strategically, it’s the right move for them,” says Wolf. “But in the end, Corning didn’t buy SDL this summer because it said the price was too high.”
With a market capitalization of $110 billion, Nortel definitely has the leverage make a large purchase, but the firm's plan to spin off its component business is still up in the air, casting a shadow of uncertainty that could make a deal of this magnitude difficult, in Wolf's view.
Agere, Lucent’s microelectronics spinoff, is another likely candidate. Agere already has a small-scale 980nm chip operation that it got through Lucent’s Ortel acquisition earlier this year. But the company just filed for an IPO this week, and its planned debut will most likely not happen before the Zurich plant is sold off (see Lucent's Agere Files for IPO).
“With Agere it comes down to timing,” says Epoch's Langley. “And they don’t have that much cash. I doubt they will want to spend every last nickel they have on another asset.”
Alcatel is also a candidate, but analysts don’t think that it’s a likely one.
“They just don’t have the cash,” says Wolf. “It’s going to be a cash transaction, not a stock deal, and it really would depend on the capital markets.” -- Marguerite Reardon, senior editor, Light Reading, http://www.lightreading.com