JDS Uniphase (NASDAQ:JDSU) announced yesterday that it intends to acquire telecom-equipment tester Acterna for $760 million in cash and stock. Inquiring Fools want to know: Is this just another Ciena (NASDAQ:CIEN) deal? A telecom trying to buy itself some growth with little success?
It's hard to say. There's not a lot of publicly available information about privately held Acterna. It was listed on the Nasdaq until 2003 (when it filed under Chapter 11), but no longer publishes the kind of financial info that public companies must. We know from JDS's announcement that Acterna has posted $440 million worth of sales over the past year. How profitable were those sales? All we know is that the company achieved a "non-GAAP" gross margin above 50%. No word on operating or net margins. No clarification on exactly how "non" the non-generally accepted accounting principles margin was.
We also know that JDS needs help; on its own, the company hasn't been looking healthy. When JDS reported earnings last month, it revealed that the first three quarters of fiscal 2005 have seen gross margins under GAAP contract to just 18% from last year's 22.6%. By JDS' own definition of "non-GAAP," gross margins came in at just 19%. If the two companies are on the same page of their make-believe accounting, Acterna could give JDS a substantial boost towards profitability -- and not a moment too soon.
Though JDS does retain a considerable war chest -- more than $900 million in net cash and equivalents -- the company is burning through that treasure at a prodigious rate. JDS had net cash outflows of $140 million in the first nine months of 2005. That's an improvement over last year's $160 million, but it still puts the company on track for $185 million or so in negative free cash flow by the end of fiscal 2005.
Between the cash burn, the closing costs for the Acterna acquisition, and the cash portion of the price JDS will pay, the new corporate entity will be left with about $450 million in net cash, plus (or minus) whatever Acterna brings to the table. It will also have 13% more shares than JDS has today, about 1.6 billion in all.
It's a pricey acquisition, even at a cost that's just over half the price-to-sales ratio JDS shares currently fetch. But it's all part of the consolidation the telecom sector needs to undergo if these companies are to become profitable again.
Fool contributor Rich Smith holds no position in any company named above.
