Infinera announced plans to acquire privately-held rival Coriant for $430 million in a move consolidating what IHS Markit recently referred to as “challengers” in the optical networking space. The deal also falls on the heels of Infinera’s management citing increased competitive pricing pressure in the space.
Infinera CEO Tom Fallon said the deal bolsters the company’s scale and competitive position in the market. This includes expectations for increased spending on network infrastructure to support 5G networks and the move from closed to open network architectures.
“Acquiring Coriant is a fantastic opportunity, strengthening our ability to serve the world’s largest network operators, accelerating our ability to leverage vertical integration, and reinforcing our commitment to our long-term business model,” Fallon said in a statement. “This powerful combination immediately benefits our combined customers by delivering the innovative technology required for the next wave of network spending.”
Infinera and Coriant were both lumped into a group of challengers within the optical networking space by IHS. Others in that listing included Fujitsu, ECI, ZTE, and ADVA. Those six vendors were graded as one step below “market leaders” Cisco, Ciena, Huawei, and Nokia.
Infinera and Coriant are comparably sized in terms of operations. Both count around 2,100 employees each worldwide and more than 500 customers.
The $430 million in total compensation includes $230 million in cash and $200 million in stock. Infinera will initially pay $150 million in cash at closing. It will then fork over an additional $25 million in the next two quarters post closing and $55 million over “a period of years.” The cash portion of the deal will come debt financing provided by Morgan Stanley Senior Funding.
Infinera will also issue 21 million shares of stock as part of the deal. Oaktree Capital Management, which owns a majority of Coriant, will be paid mostly in stock and own approximately 12 percent of the combined company once the deal closes. The purchase is set to close by the end of the third quarter.
The deal will double Infinera’s revenues and expand its customer base to nine of the world’s 10 largest network operators – five of those coming from Coriant – and the six largest internet content providers, including three coming from Coriant.
The combined entity will generate $100 million in cost savings and $250 million in operating cost savings through 2021. The total transaction cost will be paid back within three years.
Infinera’s management had cited competitive pressures as part of forward-looking comments in its most recent quarterly earnings call. Fallon at that time cautioned about “very, very aggressive pricing from some of the larger guys.”
“This is always a very competitive market. It’s been over-served for a decade or more,” Fallon said, according to transcipts. “And I think what’s a little bit different this time – and we’re putting it out – is we’re continuing to see normal type of pricing pressures in general, but we’re seeing some of the larger, more traditional optical people, I would say, being hyper-aggressive on some of the, I would call it, more important deals that are in the world.”
A report from MarketWatch cited William Blair financial analyst Dmitry Netis as stating Ciena was the source of the pricing pressure mentioned by Infinera’s management.
Fallon did attempt to temper those competitive pricing concerns.
“I don’t raise it up because it scares us to death. I raise it up because it is a little bit of a new dynamic, and I think that there’s a little bit of a land-grab mentality going on,” Fallon said. “The good news is there’s a ton of bandwidth demand out there. So, there’s lots of opportunities. But it’s a bit of a hyper-competitive place right now with more traditionally larger competitors.”
That pronouncement obscured what were solid first quarter results and sent its stock price tumbling more than 20 percent from a just-hit 52-week high. Infinera’s stock has stumbled more than 25 percent since early May.
The deal will also close some recent drama at Coriant. The company was formed in 2013, having been born out of Nokia Siemens Networks’ optical networking division under the ownership of Marlin Equity Partners. Coriant was then merged with Tellabs and Sycamore, both of which were also owned by Marlin.
Coriant in May abruptly changed leadership when former CEO and Chairman Shaygan Kheradpir stepped down from his role to pursue other opportunities. Kheradpir was replaced by Pat DiPietro who had previously served as vice chairman of the company’s board.
Kheradpir had previously briefly served as CEO of Juniper before being dismissed for “his conduct in connection with a particular negotiation with a customer.”