Infinera looks to metro with Transmode buy

Optical transport systems vendor Infinera (NASDAQ: INFN) has decided to accelerate its entry into the metro networks space via acquisition. The company has announced a plan to acquire Swedish metro systems specialists Transmode (NASDAQ Stockholm: TRMO) for approximately $350 million in cash and stock.

Optical transport systems vendor Infinera (NASDAQ: INFN) has decided to accelerate its entry into the metro networks space via acquisition. The company has announced a plan to acquire Swedish metro systems specialists Transmode (NASDAQ Stockholm: TRMO) for approximately $350 million in cash and stock.

The deal will require approval by 90% of Transmode's shareholders. Pod Investment AB, which holds the largest block of Transmode shares at approximately 33%, has pledged to vote in favor. The board of directors at Transmode has unanimously recommended that the rest of the company's shareholders follow Pod Investment's lead. Infinera hopes to close the transaction by the end of its fiscal third quarter.

Having established the DTN-X as a leading platform in the long-haul space, Infinera has begun to discuss its plans for an end-to-end networking portfolio. For example, CEO Tom Fallon obliquely referenced a metro-focused product in analyst calls last year. The company surprised observers last fall by announcing the Cloud Xpress, aimed at data center interconnect, an application the company asserted was distinct from the metro (see "Infinera ships Cloud Xpress platform"). However, a metro platform remained on the company's roadmap, executives said at the time.

Details of that product surfaced last month through the introduction of a pair of metro-focused photonic integrated circuits (PICs; see "Infinera hints at upcoming metro aggregation platforms with new PIC introductions"), as well as an article in the March/April issue of Lightwave that described the philosophy behind them (see "Transforming metro-network economics"). The company set expectations for the introduction of a metro core hub product based on a new 500-Gbps PIC set that will be able to "slice" that capacity into 100-Gbps chunks (the ePIC-500), and metro edge products that will use the other new PIC set (the oPIC-100) to leverage that sliced capacity.

However, Infinera Co-Founder and President David Welch allowed on a conference call this morning to explain the proposed acquisition that PICs would be overkill for certain metro applications, such as the metro access. In addition, the metro access requires specialized support for such applications as business services delivery and mobile backhaul and, soon, front haul that were not yet in Infinera's portfolio.

Thus, an acquisition in the metro space made sense, according to the Infinera executives on the call. Fallon said Transmode is a good choice because of its metro packet-optical transport expertise, the fact that its customer roster and geographical mix complement Infinera's and therefore present significant cross-selling opportunities, and the company's culture closely mirrors Infinera's.

Welch said that Infinera will seek opportunities to incorporate its PIC technology into Transmode's TM-Series metro platforms. It would appear that elements of the TM-Series equipped with the oPIC-100 could serve as the end points of the spokes that will radiate from Infinera's upcoming metro aggregation hub platform. Offering PIC-equipped line cards for the TM-Series also might support a migration strategy toward the metro aggregation architecture Infinera will support with its upcoming products, rather than requiring forklift upgrades.

The Infinera executives emphasized that the proposed acquisition will have no effect on the metro aggregation products' development and introduction timeline. The products remain on schedule for introduction later this year.

The acquisition proposal calls for Transmode shareholders to receive SEK 300 in cash and 4.705 Infinera shares for every 10 shares of Transmode they own. The purchase price implies a price per share of approximately SEK 109. In all Infinera will spend $96 million in cash on hand. It also will issue approximately 13.0 million new Infinera shares to Transmode shareholders.

Infinera expects the acquisition to prove accretive to non-GAAP earnings per share in 2016. Upon completion of the transaction, current Transmode CEO Karl Thedéen will join Infinera to head the company's Metro Business Group.

For more information on high-speed transmission systems and suppliers, visit the Lightwave Buyer's Guide.

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