ECI Telecom Ltd. says it's holding talks with a group of investment firms about the sale of all the company's stock for $10 per share, a price that values ECI at nearly $1.2 billion.

A sale at $10 would represent a 12 percent premium over Friday's closing price of $8.92. ECI's stock has a 12-month high of $9.49.

ECI says "there can be no assurance at this stage as to whether this transaction will be consummated, and if consummated what the actual consideration would be." It also says it won't be commenting further on the issue.

The interested investors are led by Swarth Investments LLC, a company registered in Delaware and controlled by Shaul Shani, who is already active in the telecom sector as chairman of Brazilian fixed line operator GVT .

Shani and GVT are well acquainted with ECI -- more on that later.Koor keen to kash in
The interested sellers are led by a company called IDB Holding Corporation Ltd., which owns about 41 percent of ECI stock through two of the companies it controls -- Koor Industries Ltd. , which holds about 28 percent of ECI's shares, and Clal Industries and Investments, which holds a 13 percent stake in ECI.

Koor said today that, if a sale was agreed at $10 per share, it would make a profit of about 598 million shekels ($143.4 million), while Clal said such a deal would net it 277 million shekels ($66.4 million).

For Koor, at least, increasing competition in the communications equipment sector, intensified by recent M&A activity, has led it to reevaluate its holdings. In its latest annual report, Koor notes that the creation of industry giants such as Alcatel-Lucent (NYSE: ALU) and Nokia Networks , and the acquisition-fueled expansion of Ericsson AB (Nasdaq: ERIC), is making life tougher for medium and small players.

Citing those major vendors, plus other key competitors Huawei Technologies Co. Ltd. , Nortel Networks Ltd. , and Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA), Koor notes: "All of these are larger than our affiliates and may have greater name recognition, broader product lines, larger customer bases, and more extensive relationship with customers, and accordingly may be better able to address an increasing trend in the industry in which service providers seek an overall telecommunication solution rather than to acquire separate products from heterogeneous equipment providers."

So Koor's getting out. It has already sold its stake in video equipment firm Scopus Video Networks (Nasdaq: SCOP) for $16 million; has been trying (unsuccessfully) to sell its 61 percent stake in Telrad Networks Ltd. ; and now wants to cash in on ECI while the vendor is performing reasonably well. (See Optibase Buys Scopus Stake, Telrad's Parent Has It on the Block, and Koor Ends Telrad Sale Talks.)

The one stake it hasn't made noises about so far is its 21.4 percent share of revenue assurance system specialist ECtel Ltd. (Nasdaq: ECTX), which reported a net loss of $2.3 million on sales of $28.8 million in 2006. But even that market has experienced consolidation that is making life tougher for the smaller players. (See Subex, Azure Complete Merger, Subex Targets OSS Giants, and Subex Azure Touts 13 Wins.)



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ECI health check
ECI reported net income of $18.7 million from revenues of $155 million in the first quarter of this year, though the profits were boosted by a $12.5 million tax benefit following the IPO of softswitch vendor Veraz Networks Inc. (Nasdaq: VRAZ). ECI sold some of its Veraz shares in that IPO. (See ECI Reports Q1 and Veraz IPO Comes in Low.)

The rump of ECI's business comes from the sale of optical gear, mostly to carriers in emerging and developing markets. The vendor's Transport Networking division reported sales of $105 million in the first quarter, nearly 68 percent of all revenues. (See Philippines Picks ECI, Corenet Picks ECI, ECI Wins Optical Deal, and ECI Lands Indian Optical Deal.)

Its other main unit is the Broadband Access division, which sells MSAN (multiservice access node) and DSLAM equipment to fixed-line carriers. Here, in the face of very stiff competition, ECI has managed to hang on to two very prestigious access equipment accounts at Orange (NYSE: FTE) and Deutsche Telekom AG (NYSE: DT), which are both using ECI's gear for IPTV service delivery. (See Alcatel, ECI Land DT Gig, ECI Makes Hay in Taiwan, Europe, ECI Drops Despite VDSL2 Coup , and ECI Enhances Its MSAN.)

But relying on a few customers can lead to unpredictable sales -- first-quarter broadband gear revenues of $45 million (29 percent of total sales) were down from $62 million a year earlier. The division's results in the latter part of 2006 were also disappointing. (See ECI Profits Fall.)

Koor has noted the recent weakness in the access division. In its annual report Koor notes: "Recovery in the revenues of ECI's Broadband Access Division during 2007, from the relatively low level it reached in the latter part of 2006, depends upon a number of factors. These include the transition to new broadband technologies and the pace of their adoption by ECI's customers, increased purchases by the division's two major customers, sales to new customers in the emerging markets, as well as possible sales to new European customers and the success of a new strategic distribution partnership entered into with a major communications equipment manufacturer." (See Moto to Resell ECI DSLAMs.)

Shani has history with ECI
Shaul Shani, the man behind the takeover talks, should know ECI quite well. Having been the chairman of Brazilian operator GVT since 1999, Shani will know all about GVT's credit history with ECI, which has been an equipment supplier in the past.

GVT, it seems, deployed fixed wireless gear in the years 2000-2002 from then ECI subsidiary InnoWave, and paid for the gear with interest-bearing long-term notes. But GVT defaulted on the payments in 2002, resulting in a "debt rescheduling agreement" that was finally signed in 2004. ECI offloaded the notes to Dutch banking giant ABN AMRO in 2005. (See ECI Boosts Its Balance Sheet.)

— Ray Le Maistre, International News Editor, Light Reading