DragonWave to Buy NSN Unit

Backhaul vendor DragonWave Inc. (AIM/Toronto: DWI; Nasdaq: DRWI) is to acquire Nokia Networks 's microwave transport business in a deal that could ultimately be valued at more than €100 million (US$138 million).

If the deal goes through as expected in early 2012, DragonWave will pay €10 million ($13.8 million) in cash and about €5 million ($6.9 million) in stock initially, as well as take on staff liabilities of €10 million and a capital lease agreement valued at a further €5 million, putting the up-front cost to DragonWave at €30 million ($41.5 million).

The agreement also includes potential additional payments dependent on the subsequent sales performance of the NSN microwave backhaul product line in the 18 months following the closing of the deal. These additional payments could reach €80 million ($111 million).

About 360 staff (mostly in Milan and Shanghai) will transfer from NSN to DragonWave, which will inherit a sizeable microwave transport customer base of 70 operators as part of the deal: Once the acquisition is complete DragonWave will have about 200 customers, including most of the world's Tier 1 mobile operators.

However, it's unclear what kind of impact this acquisition will have on revenues and margins at DragonWave, which is currently generating net losses on revenues of between $12 million and $15 million per quarter. (See DragonWave Reports Q2.)

The microwave backhaul unit sale is the latest example of a major equipment vendor shedding assets that are no longer deemed strategic: Alcatel-Lucent (NYSE: ALU) is selling its Genesys customer contact center business while Ericsson AB (Nasdaq: ERIC) is offloading its stake in handset firm Sony Ericsson Mobile Communications . (See Euronews: Sony Buys Ericsson Out of Handsets, Euronews: AlcaLu Confirms $1.5B Asset Sale and AlcaLu's Spare Limb.)

Industry sources suggest NSN has been hawking the business, which includes its Flexi Hybrid and FlexiPacket microwave transport product lines and its associated OSS, for quite some time but had struggled to find a buyer. (See NSN Adds Gateway, Switches, NSN Boosts Backhaul and NSN Touts Backhaul.)

What might have tempted DragonWave, though, is the longer-term potential of the deal. The Canadian specialist is already an OEM partner for NSN, but once the deal is completed it will become the preferred supplier of packet microwave backhaul systems to NSN, which believes this move will "accelerate innovation" in the backhaul space.

That preferred supplier relationship is noteworthy because packet backhaul systems will play an important role in Long Term Evolution (LTE) network rollouts, a market in which NSN is one of the leading players. (See M&A Props Up NSN's Q3 Growth, At Last: Ethernet Backhaul Booms for Carriers and Reflections on Barcelona: Decision Time for 4G.)

While that relationship looks positive for DragonWave, it's perhaps not such good news for Ceragon, currently NSN's other main packet microwave backhaul partner. NSN tells Light Reading its relationship with Ceragon will continue but that it will be used "in selected cases" where the customer specifically requests Ceragon equipment. (See Nokia OEMs Ceragon Microwave.)

— Ray Le Maistre, International Managing Editor, Light Reading

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