The telecommunications network specialist Ciena Corporation (CIEN) has been selected as the successful bidder for Nortel Network Corp.’s (NT) optical networking and carrier ethernet business for a total consideration of $769 million.

Ciena will pay $530 million in cash and $239 million in convertible notes for Nortel’s Metro optical and Ethernet Networks (MEN) division. This is up from Ciena’s previous bid of $522 million ($390 million in cash and 10 million Ciena shares).

Nokia Siemens Networks, a joint venture between Nokia (NOK) and Siemens AG (SI), challenging Ciena’s bid for the Nortel assets lost the bid in a three-day auction.  Nokia Siemens said that further bidding could not be financially justified.

Ciena said it expects the deal to be significantly accretive to its operations in fiscal 2011. The transaction is expected to close in the first calendar quarter of 2010.

Ciena will take over Nortel’s long-haul optical transport portfolio, metro optical Ethernet switching and transport solutions, Ethernet transport, aggregation and switching technology, multiservice SONET/SDH product families and network management software products.

We believe that the deal has the potential to drive significant growth in Ciena’s rapidly expanding metro Ethernet business and optical networking products. The Nortel deal would be the largest ever for Ciena and would also help it expand geographically and provide higher cross-selling opportunity.

Also, the merger could double Ciena’s revenue. Nortel’s Ethernet business generated $1.36 billion in revenue in 2008 and $556 million in the first six months of 2009.

While the Nortel acquisition will enable revenue growth, integration risk is a major issue in our opinion. Ciena will incur integration-related costs in 2010, which will dilute its earnings.

Ciena exited the most recent quarter with $1.07 billion in cash, short-term and long-term investments and had $798.0 million in long term debt (convertible notes payable). The deal will also pull Ciena into a net debt (debt exceeding cash) position. Moreover, the company will offer jobs to at least 2,000 Nortel employees, thus increasing operating costs.

Ciena upped its offer by more than $200 million to clinch the deal. We are deeply concerned regarding the integration of Nortel, which could be a major problem for Ciena. Moreover, we believe that such a high price cannot be justified.

Longer-term, we view the deal to be positive for Ciena. However negative investor sentiment loom on the stock. We expect the stock to open lower on Monday.

Zacks Investment Research

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