Consolidation has hit the optical systems space, as Infinera has announced its intention to buy fellow optical transport and SDN platform vendor Coriant for a total consideration of $430 million in cash and stock. The acquisition is expected to close in the third quarter of 2018, subject to customary closing conditions.
Infinera positions the deal as an opportunity to scale in the ramp toward what it predicts in a press release announcing the transaction will be “the next wave of global network spending as network operators transform their networks to transition from 4G to 5G, from Optical Transport Network (OTN) to packet and from closed to open network architectures.” According to David Heard, product realization officer at Infinera, the acquisition increases both product breadth as well as customer base. He cited Coriant's strengths in mobile networking as well as metro core, the latter of which will complement the metro access products Infinera gained when it acquired Transmode in 2015 (see "Infinera embraces Transmode, new products in metro portfolio"). Meanwhile, the acquisition will approximately double Infinera’s revenue. Post closing, the company will serve 9 of the top 10 global network operators (five of which will be new to Infinera) and the top six global internet content providers (three new to Infinera). The Infinera expects the new assets to prove “substantially accretive” in 2019, based on $100 million of identified cost savings in both cost of goods sold and operating expenses. The company predicts total cost synergies of $250 million through 2021.
Along these lines, Infinera believes it can improve Coriant’s product efficiency by introducing the kind of vertical integration Infinera has enjoyed via its photonic integrated circuit (PIC) expertise as well as its work in coherent DSPs (see, most recently, "Infinera fifth Infinite Capacity Engine ICE5 supports 2.4 Tbps"). Coriant has embarked on vertical integration efforts itself, having partnered with sister company Elenion Technologies to create a CFP2-ACO optical transceiver for some of its optical transport platforms (see "Coriant offers 200-Gbps short-reach CFP2-ACO for Groove G30 platform"). In fact, the drive toward vertical integration directly led to the deal, according to Heard. He said that Coriant and its private equity founder, Marlin Equity Partners (which assembled Coriant from parts of other companies; see "Coriant unleashed as Marlin Equity Partners closes acquisition" and "Marlin Equity Partners reshuffles executive deck ahead of Coriant, Tellabs merger") spent about $1 billion on R&D related to vertical integration and silicon photonics as an enabling technology toward that goal (hence the creation of Elenion). However, after Oaktree Capital Management became a major investor (see "Marlin Equity Partners makes room for Oaktree Capital on Coriant investor roster"), it decided that finding a partner with the ability to more directly enable vertical integration was a more efficient strategy. Oaktree then contacted Infinera to discuss a potential deal, according to Heard.
Heard believes Oaktree also contacted other systems houses, but decided an alliance with Infinera presented the most upside. That growth potential is represented in what some would consider a surprisingly low transaction value for the deal, as well as the fact that Oaktree wants its share of the proceeds largely in Infinera stock, Heard explained. Oaktree will own approximately 12% of the combined company on a fully diluted basis. Oaktree has agreed to lock up 50% of its shares for six months after the deal closes and the remaining 50% for 12 months.
The purchase agreement calls for Infinera to pay approximately $150 million in cash at closing, and approximately an additional $25 million in the succeeding quarters post-closing, as well as $55 million “over a period of years” Infinera didn’t specify. The company also will issue approximately 21 million shares, worth approximately $200 million, that when combined with rebates from the cash outlay to cover things such as cleaning up Coriant's balance sheet, results in the total transaction consideration of approximately $430 million.
For the cash part, as well as for some extra spending money, Infinera says it will pursue debt financing. Morgan Stanley Senior Funding, Inc. has committed to provide debt financing for the transaction, subject to customary conditions.
Coriant declined an interview request “We couldn't be more thrilled to be joining forces with Infinera, and the reaction from our customers has been extremely positive," said Pat DiPietro, CEO and vice chairman of Coriant, in a quote provided instead. "This is a highly complementary combination that represents a great opportunity to leverage the substantial expertise and global footprint of both companies to accelerate market leadership at a critical inflection point in the industry.”
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