Tellium Takeover Plan Brewing
A New York-based private equity firm with over $40 million under management says that it is putting together a proposal to buy Tellium. It then plans to sell all the company’s assets, in an effort to return shareholder investments.
This firm, which spoke to Light Reading on condition of remaining unnamed, says it has recently been buying shares in the company in preparation for a takeover. While the firm hasn’t officially approached Tellium with a deal yet, it says the company is ripe for liquidation.
The strategy has plenty of holes in it. First of all, $40 million is not a lot of money (relatively speaking), and it would be difficult for a small player without a big reputation to convince shareholders a buyout would be in their best interest. Tellium currently has a market capitalization of $70 million.
But some investors say their ears are open -- and they appear to be running low on patience. One European fund manager, whose combined client investment in Tellium makes him among the top ten investors in the company, says he thinks liquidation is the only option at this point.
“I think the company’s management has lost credibility,” says the investor, speaking under condition of not being named. “They are always promising new business and never delivering. The company has no right to be in existence. It is just burning through cash that we put up.”
David Jackson, formerly an equities analyst with Morgan Stanley, who is now looking to start his own hedge fund, says that Tellium is in a particularly difficult position because its product requires carriers to change their architectures from a ring topology to a meshed topology.
"Big architectural projects like that have been put on the back burner," he says. "This means that for Tellium the medium- to long-term outlook looks bad, because no one is taking on big projects like this. The big question now becomes: How long do you wait for the market to turn around while the company continues to burn cash?"
That's precisely the question investors are asking. The company has made some strides in reducing its cash burn rate, including enacting several rounds of layoffs -- the most recent one having been announced last week (see Tellium Lays Off 130 and Tellium Wields the Axe).
Tellium, like other bubble-era companies, raised a large amount of cash during its initial public offering (IPO) in the spring of 2001 (see Market Gives Tellium a High Five). Since then, however, it has failed to generate much revenue and has continued to mount losses. In the third quarter of 2002, it brought in just $1.5 million in revenue and recorded a $17.4 million loss (see Tellium Reports Q3). It currently has about $183 million in cash, having spent $22.9 million during the quarter. Its stock price is currently about $0.60 per share.
The company has struggled to win new customers, and its outlook for 2003 continues to be bleak. Only two carriers -- Dynegy Inc. (NYSE: DYN) and Qwest Communications International Inc. (NYSE: Q) -- generated revenue for Tellium in the first nine months of 2002, according to its last quarterly filing with the Securities and Exchange Commission (SEC).
In December of 2001, Qwest modified its original $300 million contract with the company (see Qwest and Tellium Revise Contract). The carrier is not expected to generate much, if any, revenue for Tellium in 2003. Tellium's relationship with Qwest, incidentally, has been the subject of scrutiny from a number of recent shareholder class action suits, accusing executives of the two companies of some underhanded dealing (see Tellium Lawsuits Allege Rigged IPO).
Tellium also recently amended its $350 million contract with Cable & Wireless (NYSE: CWP) (see C&W, Tellium Rework Contract). The carrier has agreed to purchase a minimal amount of gear in the first half of the year, but is not required to make any additional purchases.
Some shareholders, like the European fund manager, say they are ready to throw in the towel. They are frustrated with Tellium's lack of customer traction, and they want their money back.
Tellium did not respond to Light Reading's requests for comment, but Bill Roper, a member of Tellium's board and executive vice president at Science Applications International Corp. (SAIC), had something to say.
He wouldn’t answer specific questions about selling or liquidating the company. But he did comment generally about his responsibilities as a board member.
"If a significant proportion of the shareholder base has important input on strategy or direction for the company, I think it’s incumbent on the board to listen to that input and give it fair hearing," he says.
Tellium isn’t the only company in the industry that is being sized up for liquidation. CoSine Communications Inc. (Nasdaq: COSN) last month rejected two offers from Wyndcrest Holdings LLC, a private venture firm based in Florida (see Floridians Bid for CoSine ). Other companies such as Corvis Corp. (Nasdaq: CORV) and Sycamore Networks Inc. (Nasdaq: SCMR) are also potential targets, says David Jackson. Sycamore has $1.02 billion in cash and investments and had revenues of only $5.9 million last quarter (see Sycamore Reports Q1). Net loss for the first quarter of fiscal 2003, on a GAAP basis, was $17.4 million. Corvis, meanwhile, has $548.7 million in cash and brought in just $1.4 million in revenue last quarter (see Corvis Reports Tiny Revenues). Its losses were $127.4 million.
"I think we will definitely see a lot more of this kind of activity in 2003," says Jackson. "Investors are increasingly growing more impatient with these small-cap companies. They are no longer growth investors and are now more interested in value."
Liquidating a company is no easy task. If the board rejects a bid from a private group of investors, shareholders have little recourse unless they can rally the support of larger investors. A private firm could take over a company by purchasing enough shares from the largest stakeholders to gain majority ownership in the company. At that point, they could vote in a new board of directors, who in turn could make the decision to liquidate and disperse cash to shareholders.
— Marguerite Reardon, Senior Editor, Light Reading