Ciena inks US$521 million deal for Nortel assets

Nortel Networks Corp., which has agreed to sell its carrier wireless and enterprise divisions, said Wednesday it reached tentative agreement to sell other assets to Ciena Corp.

Toronto-based Nortel announced it has agreed to sell “substantially all assets” in both the optical networking and carrier Ethernet businesses to Ciena for US$390 million in cash, plus 10 million shares of Ciena.
“This is the last big piece (of Nortel that they are selling),” said Mark Tauschek, lead analyst at London, Ont.-based Info-Tech Research Group. “After this there’s a couple of tiny little pieces. It’s pretty much the end of Nortel once this goes through.”

Based on the most recent share price, this would bring the value of the sale to US$521 million, the proceeds of which would go to Nortel’s creditors, including bond holders and former employees who are owed severance pay.

Nortel has been operating under bankruptcy protection since Jan. 14 and has been trying to sell most of its assets since June.

Since then, Nortel has agreed to sell two of its major operations. Last month, Avaya Inc. of Basking Ridge, N.J. agreed to pay US$915 million for the enterprise business, which  makes switches, routers, private branch exchanges, phones, unified communications, voicemail systems and firewalls. In July, Nortel agreed to sell part of its carrier wireless business – including code division multiple access (CDMA) base stations and – to Stockholm-based LM Ericsson. That deal, which includes a non-exclusive license for Nortel’s Long Term Evolution (LTE) wireless patents, cost Ericsson US$1.13 billion.

Nortel initially tried selling its metro Ethernet assets a year ago but took them off the auction block.

Nortel announced this week it is also auctioning off its wireless assets based on the global system for mobile communications (GMS) standard.

The agreement between Ciena and Nortel is known as a “stalking horse” bid, meaning other companies could make higher bids. This is what happened with both the carrier wireless and enterprise deals. Avaya announced a stalking horse bid in July for US$475 million and had to increase its offer to US$915 million because two other companies – rumoured to be Siemens Enterprise Communications and MatlinPatterson – participated in the auction.

The agreement to sell the CDMA assets to Ericsson started with a US$650 million stalking horse bid from Nokia Siemens Networks in June.

It was not immediately clear whether the sale to Ciena will involve just intellectual property or whether Ciena would the buyer be taking on Nortel employees and facilities as well. Both Avaya and Ericsson agreed to offer jobs to some Nortel employees.

“Nortel cannot comment on the potential values or details of any potential agreement with Ciena or other third party,” a spokesman stated in an e-mail to Network World Canada.

Ciena is based in Linthicum Maryland, located south of Baltimore. Its products include service delivery switches, service aggregation switches and Ethernet Services Manager, which are used to  provide backhaul for Clearwire’s WiMAX service in Las Vegas.

Founded in 1992 as a manufacturer specializing in long haul products using dense wavelength division multiplexing, Ciena branched out into other networking segments, including access products for metropolitan and enterprise networks, starting in 2001.
“Carriers are going to have to cave in an bring in fibre close to the home,” Tauschek said of the metro Ethernet market. “I think it’s sill an attractive market to be in.”

As of July 31, Ciena reported it has US$436 million in cash and lost US$554 million during the nine months ending July 31. Of that, the firm lost US $26.5 million during the most recent quarter.

The company has had the same president, Gary B. Smith, since October, 2000. Smith, who was also appointed chief executive officer  in 2001, has been with Ciena for 12 years.

The company’s chief operating officer, Arthur Smith, was an optoelectronics research engineer with Nortel from 1988 until 1997, when he joined Ciena.
Tauschek said he would be surprised if no other companies announce competitive bids to buy the assets Ciena has agreed to buy. He added the price of US$521 million seems low, considering the US$1.13 billion Ericsson agreed to pay for the wireless units. But he predicts Ciena will be the buyer.

Nortel built up its optical networking business partly through acquisitions. For example, in 2000, Nortel bought Qtera for US$3 billion, so it could make products that would transport signals more than 4,000 km at 10 Gbps without using optical-electrical converters. That same year, Nortel bought photonic switching maker Xros for US$3.25 billion and Wilmington, Mass.-based CoreTek, which made vertical cavity surface emitting laser and micro-electromechanical systems for optical networking,  for US$1.43 billion worth of stock.