Should Tellabs call off its deal with AFC?


Not in the distant past, Tellabs made and rescinded a bid for a company called Ciena. In hindsight it proved to be a prudent move, and perhaps it is time for the company to reconsider its bid for AFC, for things are not going as planned. Aman Kapoor who is the principal behind boutique research firm Packetology believes that stock markets are making a very valid argument for either repricing the deal or all together terminating it. “The current deal structure (1.55 shares + $7/share) should have AFC valued at $19.9, but AFC market price is at $16.4. Clearly the $3.50 difference indicates that market either expects the deal to be re-priced or be terminated,” he writes in his morning note.

He is not alone – UBS analyst Nikos Theodosopoulos expects deal to be repriced at 1 share +$7/share or around $15.28 or another 7% below the market price of AFC. There is a lot of bad news in AFC right now. For instance, AFC has now missed two out of five milestones for the Verizon contract and is now in breach of contract which would indicate that Tellabs might not be able to get the big “upside” opportunity from FTTP, Kapoor adds. Also, AFC’s core business of digital loop carriers is under tremendous pressure from Alcatel and Calix (a private company in Photon Valley) and hasn’t performed upto par. The company said so in its conference call.

“So in Tellabs’s view they are buying a money losing business with great “upside” and the cash flow business which was slow growth is now becoming less profitable,” Kapoor points out. Hopefully, Krish and Co. will also see the light. As an aside, apparently Motorola’s and Alcatel’s FTTN product is better than AFC solution. So the negotiating power is really in Tellabs hands, according to Kapoor. History repeats it self, and perhaps it is time to learn from the past.

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