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Nortel Takes a Look at Tellabs

Nortel has emerged as the most recent suitor for Tellabs, Light Reading has learned

Phil Harvey

August 30, 2007

3 Min Read
Nortel Takes a Look at Tellabs

Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA) is still in talks with potential buyers and the latest name to join the party is Nortel Networks Ltd. , Light Reading has learned.

Tellabs is seen as a solid technical fit for Nortel, according to sources close to both companies, and one Light Reading source on Wall Street says Nortel is ready to make an offer in the range of $14 to $15 a share.

Tellabs was up $0.14 (1.38%) to $10.25, on below average volume, in trading on Wednesday, giving it a market value of $4.5 billion. Nortel was up $0.08 (0.46%) to $17.60.

Nortel, which missed out on Avaya earlier this year, has been on the hunt for a way to expand its businesses now that its financials have stabilized. (See Nortel: Kissing Avaya Goodbya? and Nortel's Z-Man Hints at M&A.) Tellabs, the central figure in nearly every telecom M&A rumor this year, was reportedly close to being snapped up by Nokia Networks in July. (See Is Nokia Siemens Tailing Tellabs? and Tellabs Mum on M&A Talks.)

Our Wall Street source indicates that the Nokia Siemens talks are ongoing, but Nortel is throwing its hat in the ring as well. And, for Nortel, that's one way it can bring back the scale and sway it once had in North America, before years of cost cutting took its toll.

"A real turnaround will need renewed revenue growth, and [Nortel's] various initiatives on this front could take years to come to fruition (if ever)," wrote Deutsche Bank AG analyst Brian Modoff in a note to clients issued Aug. 2.

The Tech Story
Sources close to both companies say the technology story of a Tellabs/Nortel combo would be fitting. "There's almost no product overlap and the ROADMs that Tellabs has could help Nortel modernize its optical networking story -- maybe giving it something to upsell to its old Optera customers," says one source.

Others point out that even for Nortel's focus on wireless -- and recent obsession with IPTV -- Tellabs would work. The Tellabs 8600 and 8800 are used in various wireless network applications, with the former being used mostly as wireless backhaul. In Australia, Telstra has been deploying the 8800 as a replacement for Nortel's incumbent Passport switches: Nortel had been supplying Telstra with data switches since 1989. (See Telstra Unveils Next IP.)

In the access technology market, sources say Tellabs could use Nortel's weight to ramp up its FTTH business, which has hit some speed bumps in the GPON races at AT&T Inc. (NYSE: T) and Verizon Communications Inc. (NYSE: VZ). (See AT&T Picks GPON Players.)

Nortel, having backed away from the broadband access business years ago, could use Tellabs's gear to boost its IPTV applications story. (See Nortel Eyes IPTV Prospects, Sources: Nortel Planning IPTV Acquisitions, and Nortel CEO: We Blew It on DSL.)

Examining Options
Aside from the chatter on Wall Street, some options trading may provide another clue that investors believe Tellabs will be sold. Susquehanna Financial Group published a note Wednesday pointing out that Tellabs investors are "rolling a long call position from September to October." The move was a call option to buy 10,000 shares of Tellabs for $12.50 before October 20.

The analysts at Susquehanna say the move implies the investor anticipates "increased volatility" in the stock before late October.

Granted, we can't read the investors' minds, and they may have been buying the options to offset the risk of a short position. But experts say the move suggests investors see an upside in Tellabs's shares.

In addition, the options move noted above coincided with the first whispers that Nortel was in the hunt for Tellabs. "Perhaps renewed speculation of a potential deal prompted investors to roll out the position,” says Chris Jacobson, a Susquehanna analyst.

Tellabs and Nortel, respectively, declined to comment on rumor and speculation. They won't comment on this article, either.

— Phil Harvey, Managing Editor, Light Reading

About the Author(s)

Phil Harvey

Editor-in-Chief, Light Reading

Phil Harvey has been a Light Reading writer and editor for more than 18 years combined. He began his second tour as the site's chief editor in April 2020.

His interest in speed and scale means he often covers optical networking and the foundational technologies powering the modern Internet.

Harvey covered networking, Internet infrastructure and dot-com mania in the late 90s for Silicon Valley magazines like UPSIDE and Red Herring before joining Light Reading (for the first time) in late 2000.

After moving to the Republic of Texas, Harvey spent eight years as a contributing tech writer for D CEO magazine, producing columns about tech advances in everything from supercomputing to cellphone recycling.

Harvey is an avid photographer and camera collector – if you accept that compulsive shopping and "collecting" are the same.

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