So I hear analysts at S&P and other firms aren't thrilled with Ciena's (Nasdaq: CIEN ) decision to grab a piece of Nortel this week. Analysts worry about the "significant integration efforts" it will entail, and fret over the disappearance of Ciena's net cash position.
Well, boo-hoo. But I've got a slightly different reaction to the news:
Way to go, Ciena!
Recent months have seen Nortel's erstwhile rivals hard-pressed to control their drooling. Ericsson (Nasdaq: ERIC ) shelled out $1.1 billion to acquire Nortel's wireless assets. Avaya (a former Lucent subsidiary) snapped up Nortel's enterprise business for $900 million.
But some of the biggest names in telecom have so far played the wallflower at Nortel's funeral -- Nokia's (NYSE: NOK ) pretending it doesn't speak English, Alcatel-Lucent (NYSE: ALU ) and Juniper (Nasdaq: JNPR ) aren't talking, and Cisco's (Nasdaq: CSCO ) staring at its toes, hands firmly planted in its pockets. Not so, Ciena. This up-and-coming telecom equipment salesman brazenly strode to the casket this morning and began rifling through the pockets of Nortel's corpse. And what did Ciena find?
Not pocket change
On Wednesday, Ciena confirmed it will shell out a combined $521 million in cash and stock to acquire "substantially all" of Nortel's optical networking and carrier ethernet assets. The prizes will be "complementary" to Ciena's existing switching and transport businesses. But that's an understatement.
According to Ciena's press release, the acquired assets generated $1.36 billion in revenue for Nortel last year, and based on their performance through the first half of 2009, are on track to produce another $1.1 billion of revenues this year, our anemic economy notwithstanding. For those of you keeping score, that's roughly twice the size of Ciena's own trailing revenue stream.
But here's the best news: This works out to a purchase price of less than 0.5 times sales. Even if you include Ciena's estimate of $180 million in integration-related costs as part of the price Ciena is paying, you're still looking at just over a 0.6 times valuation -- fully one-third lower than the 2.0-times-sales valuation that investors currently pay for Ciena's own shares.
Foolish takeaway
Is Ciena taking an enormous gamble? Sure it is. The company plans to move 2,000 Nortel workers into its own employ, essentially doubling the size of Ciena's existing workforce. It's betting the bulk of its cash reserves on the deal's success. Also, the profitability of these assets is in question, which could throw a wrench into a price-to-sales analysis. After all, there's a reason Nortel went bankrupt. But at this price, it's a good bet to make; Ciena should be able to put these assets to profitable use in time.
Call me crazy, but I think this is a steal of a deal for Ciena -- and a great time to own the stock.
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