Test & Measurement

JDSU Deal Addresses Finisar's Debt

The sale of its test division frees up Finisar Corp. (Nasdaq: FNSR) to be purely an optical company. But maybe more importantly, it raises cash to deal with some debts that come due in just more than a year.

On Oct. 15, 2010, Finisar has to pay off two sets of notes totaling $142 million. That's been a troublesome point for investors, because the company's cash reserves -- $37 million as of April 30 -- aren't nearly enough to cover it all. "Uncertainty over how Finisar would handle the outstanding debt has been a drag on the stock," writes analyst Paul Bonenfant of Morgan Keegan & Company Inc. in a note published today.

So, raising $40.9 million in cash by selling the Network Tools division to JDSU (Nasdaq: JDSU; Toronto: JDU) -- a deal announced today -- would be a help. (See JDSU Buys Finisar's Test Biz.)

That's because it would be a key part of another deal Finisar announced today: an exchange offer for up to $95 million of its debt. For $1,000 in notes, the company is offering $700 to $750 -- consisting of $525 in cash and the rest in stock. The cash would come from JDSU's $40.9 million.

The exchange is being done as a modified Dutch auction, meaning notes holders have to declare how much of the debt they'll exchange and at what price within the range.

Assuming Finisar exchanges the full $95 million target amount, it will be left with $47 million in notes, a much more manageable figure.

JDSU seems to have gotten a nice deal for the Network Tools business, as the sale price is close to the $44.2 million in revenues that the division had during the fiscal year ended April 30.

Minus the bond issue, would Finisar have wanted to sell off its test business? Possibly. Test accounted for only 8 percent of Finisar's $497 million in revenues for fiscal 2009 and wasn't exactly growing like a weed. Network test revenues in 2008 and 2007 were $38.6 million and $37.3 million, Finisar says.

"It certainly was sort of the red-headed stepchild of the family, just because it didn't match," says Andrew Schmitt, optical analyst for Infonetics Research Inc.

JDSU, on the other hand, has sizeable businesses in both optical components and test equipment, and that recalls a question that's been bouncing around for a couple of years: "What's JDSU going to be when it grows up? It's like two different companies, and it doesn't have the imbalance that Finisar did," Schmitt says.

— Craig Matsumoto, West Coast Editor, Light Reading

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