Nortel Networks Corp. of Toronto has agreed to sell its metropolitan Ethernet and optical networking units to Ciena Corp. for $769 million, $248 million more than its initial offer announced Oct. 7.
Ciena plans to offer jobs to at least 2,000 Nortel employees, about 1,400 of whom would be based in Canada. Nortel has 2,300 employees in those units, said James Frodsham, Ciena's senior vice-president of corporate development.
"I'm sure everyone at Nortel is happy to put this chapter behind them," said Andrew Schmitt, directing analyst for optical at Campbell, Calif.-based Infonetics Research. "My guess is it’s going to be a very positive event for them. They will have a lot of the uncertainty about their future removed."
Although Linthicum, Md.-based Ciena offered $521 million last month for the units of Nortel, this was a “stalking horse” bid, meaning other companies were invited to make higher offers.
Nokia Siemens Networks, a joint venture between Nokia Corp. and Siemens AG, was the only other company that placed a bid for the carrier Ethernet and optical networking assets, a Nortel spokesperson said Monday.
Nortel has been operating under bankruptcy protection since Jan. 14 and has been selling off most of its business units. In September, Avaya Inc. of Basking Ridge, N.J. bought Nortel’s enterprise business and on Nov. 13, Telefonaktiebolaget LM Ericsson completed the acquisition of most of Nortel’s wireless cellular business.
The sale of its carrier wireless unit to Ericsson and the enterprise business to Avaya started with stalking horse agreements. Nokia Siemens Networks made a US$650 million stalking horse bid in June for the carrier wireless assets that Ericsson eventually acquired.
Nortel announced last month it is also selling the unit that makes Global System for Mobile Communications (GSM) products, which include Mobile Switching Centre Server, Media Gateway and Home Location Register (HLR). This auction, originally scheduled Nov. 5, was delayed. Nortel said last week it plans to make an announcement this week on the GSM sale.
With the sale of the Ciena unit, Nortel has nearly dismantled the company originally established as Northern Electric, which started as Bell Canada Enterprises Inc.’s manufacturing unit.
The Nortel products that will benefit Ciena the most are those that route optical traffic at 40 Gigabits per second (Gbps) and 100 Gbps, Schmitt said.
"Nortel is consistently ranked as a leader in 40 and 100 G Optical transport by a wide margin," Schmitt said. "They’re very well respected for providing solutions in that area."
The main products Ciena will inherit include the Metro Ethernet Routing Switch 8600 and the Optical Multiservice Edge 6500, Frodsham said.
The OME 6500 is designed to manage and transport voice and data services, and to provide multi-span links of more than 2,000 km without requiring in-line dispersion compensation equipment. The MERS 8600 is designed to provide virtual private
networking and video services at 1 or 10 Gigabits per second.
Frodsham said most of the business is with service providers, but it also sells to enterprise and government customers.
Buying Nortel’s carrier Ethernet and optical units will help Ciena sell to carriers who want to carry packet-based services, including video, over their networks.
“Look at what’s happening in video applications and the development of new services,” Frodsham said. “A good example is Cisco TelePresence.”
He added consumers using YouTube and cellular carriers upgrading to fourth-generation will place “tremendous stress” on carrier networks.
“Nortel’s technology leadership in terms of 40 G and 100G is well aligned to support those trends,” Frodsham said.
Of the $769 million Ciena will pay, $530 million will be in cash and $239 million will be in the form of convertible notes due June 2017. The notes will initially carry an interest rate of six per cent per year, payable every six months. Those who receive the notes will have the option of converting them into Ciena shares.
"Ciena absolutely must make this acquisition work,” Schmitt said. “It is a 'bet the company' move for them."
Ciena expects the sale will close during the first three months of 2010.
Ciena’s products include service delivery switches, service aggregation switches and its Ethernet Services Manager.
Infonetics predicts sales of optical network hardware will grow to US$17.2 billion a year in 2013. Sales in 2008 were US$15.5 billion.
Schmitt said the biggest trend in carrier networks affecting Ciena will be the move towards wavelength division multiplexing (WDM) and other optical technologies in transporting packetized content, including video and wireless traffic.
Industry Canada is currently reviewing the sale of Nortel's enterprise unit, which includes private branch exchanges (PBXs), routers, switches, phones, unified communications and firewalls. This is because Avaya is paying US$915 million for those assets, and the Investment Canada Act requires a review of all foreign acquisitions exceeding $321 million.
Although Ericsson paid US$1.13 billion for the wireless assets – which include code division multiple access (CDMA) infrastructure for cellular carriers and a licence to use Nortel’s Long Term Evolution (LTE) patents, that deal was not subject to an Investment Canada Act review. This is because Nortel and Ericsson claimed the “book value” of the assets Ericsson is getting are worth only $149 million.
Ciena has applied to Industry Canada for approval but Frodsham said he does not know yet whether the Investment Canada Act threshold will apply.