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Nortel's auction of optical unit in limbo

Thu, 08/15/2002 - 8:00pm
Sarah Cohen

Copyright 2002 The Deal L.L.C.

The Daily Deal…08/16/2002

From LexisNexis

How far have valuations of optical component companies fallen in two years? After turning down an offer of $100 billion in stock from Corning Inc. in 2000 for its optical components business, Nortel Networks Inc. today seems unable to offload the unit for as much as $50 million.

The auction for Nortel Networks' optical components business is "deader than a door nail," said one optical networking analyst, who spoke on condition of anonymity. Others added that there are a clutch of interested buyers for the business, but none willing to pay anywhere near the anticipated asking price of about $300 million in late May when the unit was put on the block, nor the $50 million many now deem it might be worth.

In the deeply troubled world of telecommunications, auctions fail, of course, and are revived and sometimes fail again. A year might well pass before a sale is closed or the business is shuttered. That's exactly the time frame Allentown, Pa.-based telecom chip maker Agere Systems Inc. said Wednesday, August 14, it would follow for the sale or shutdown of its own optical chip division by June 2003.

But analysts believe that Nortel, which has seen its shares trade for weeks at below $1 a piece, wants desperately to sell its optical components business rather than substantially downsize or shut it down. The reason: 70 percent of the chips it makes are sold to itself.

Nortel's received some bids, too, say analysts. Silicon Valley powerhouses Intel Corp., JDS Uniphase Corp. and Agilent Technologies Inc., as well as Bookham Technology plc of Britain and Sumitomo Electric Co. of Japan have all expressed interest in the Nortel unit. But not at a price Nortel is willing to accept.

Brampton, Ontario-based Nortel declined to comment on the progress of the auction.

What's the problem? Jim Jungjohann, an analyst with CIBC World Markets, says one of the reasons the value of Nortel's optical components business fell so sharply so fast is due to the division's high cash burn rate of about $15 million to $20 million per quarter. The burn rate is not only unappealing in and of itself but limits potential bidders.

Arnab Chanda, an analyst for Lehman Brothers Inc., added that Nortel's optical components unit generates about $150 million in trailing annual sales, but Nortel's own stock trades at 0.3 times annual sales. Dreams of fetching a premium seem dim indeed.

Moreover, the optical components industry suffers from an enormous oversupply, not only of products but also vendors. Analysts estimate that there are 1,100 startups and more established companies selling optical components.

And yet there are buyers out there for the unit even still. Vincent Valentine, senior vice president with Boston-based investment bank Fechtor, Detwiler & Co., said JDs bid for Nortel's optical components assets in Ottawa and California to gain a type of manufacturing capability for the making of high powered lasers.

Valentine noted that JDs own manufacturing tended toward better packaging efficiencies, but lacked high power capabilities. JDs, he said, wanted to merge the two styles to make components with broader applications. JDs declined to comment.

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