Tellabs/AFC: The Ever-Shrinking Deal?
Tellabs once offered to buy AFC in an all-stock deal worth between $2.08 billion and $2.17 billion, according to the company's filings with the Securities and Exchange Commission (SEC). However, after several rejected offers by AFC and some stock market fluctuation, the two companies finally settled on a cash-and-stock transaction worth $1.9 billion, a deal that some feel is now in danger of being repriced (see Is the Tellabs-AFC Deal in Danger?).
According to a June 23 filing by Tellabs, Tellabs chairman Michael Birck and AFC chairman John Schofield first met to talk about industry conditions in February 5, 2003. By February 16, 2004, Birck proposed that the two companies should merge.
The filing then gives the following detail about the original stock-for-stock offer: "Mr. Birck followed up that discussion with a letter dated February 17, 2004, proposing an all stock merger at an exchange ratio… of between 2.3 and 2.4 shares of Tellabs common stock for each share of AFC common stock was reasonable."
Had AFC accepted that offer, given Tellabs share price as of February 17, AFC's purchase price would have been between $2.08 billion and $2.17 billion.
Instead, AFC asked for a more favorable price, one with a "premium to AFC’s market price," the filing states.
On March 11, Schofield proposed "that Tellabs add a cash component to the proposed consideration if that would assist Tellabs to increase its offer."
Tellabs responded with an offer of $7.00 per share cash payment and 1.68 shares of Tellabs stock for each share of AFC common stock. By April 19, however, AFC's share price had dropped nearly 10 percent since the Tellabs offer made on March 19.
On May 12, "Mr. Birck and Mr. Schofield mutually agreed to… an exchange ratio of 1.55 shares of Tellabs common stock plus $7.00 for each share of AFC common stock, which represented a premium of 28.2% over AFC’s closing market price of $16.24 on that day based on the Tellabs common stock closing price of $9.06," the filing states.
Now, according to some sources, Tellabs might convince AFC to lower its price to around one share of Tellabs plus $7 per share in cash. Using Tellabs May 12 closing price, such a change would drop the price of the deal down to at most $1.4 billion.
As Light Reading reported yesterday, two sources confirm that Tellabs has cancelled an investor roadshow promoting the deal and that the two companies are looking at a renegotiation. Of course, AFC chief Schofield has about 4 million reasons to make the deal happen, regardless (see Merger Could Reward AFC's Schofield ).
In early afternoon trading on Wednesday, Tellabs shares were down $0.21 (2.31%) to $8.89, and AFC shares were up $0.09 (0.56%) to $16.10.
— Phil Harvey, News Editor, Light Reading