Tellabs buys AFC

Tellabs is buying Advanced Fibre Communications for $1.9 billion, bringing high-speed access gear to Tellabs’ portfolio as well as a five-year contract to provide fiber-to-the-premises gear to Verizon.

The deal, expected to close by year-end, will result in a company that can provide both access and transport gear to major carriers. Tellabs historically has been a major supplier of digital cross-connects to the RBOCs.

The acquisition represents another step in the ongoing reshaping of Tellabs to supply packet-based gear to service providers. That transformation has meant both massive layoffs and aggressive acquisitions of technology that allow the company to branch out into new areas.

Over the past three years the company has bought IP/MPLS service-switch vendor Vivace and next-generation multiplexer vendor Ocular.

Tellabs is pitted against Ciena and others for supplying carriers with optical gear and seems to have a similar strategy for broadening its product line to generate new revenue. Ciena has acquired edge switch vendor WaveSmith Networks and broadband access vendor Catena, and invested in edge router maker Laurel Networks.

Noting these parallels last fall, UBS Warburg Analyst Nikos Theodosopoulos predicted that Tellabs would buy a broadband access company and mentioned AFC as a likely target. Last week, Theodosopoulos stated that the companies have little product overlap and potential revenue synergies, but there is some longer term risk.

“The potential synergy of this deal in 2005 is difficult to predict,” he states in a report on the acquisition. “We would need to get better clarity on several issues: the ability of Tellabs to achieve revenue synergies and recover from competitive pressure in the independent telco market; and AFC’s ability to generate the potential $100 million in Verizon FTTP sales.”

AFC gains a substantial amount of revenue from independent telcos but is facing increasing pressure from a partnership between Nortel and Calix, Theodosopoulos notes. And though consensus analyst estimates call for AFC to do $100 million in FTTP business with Verizon in 2005, Theodosopoulos thinks those expectations are aggressive.

“AFC is currently the sole supplier of active FTTP equipment to Verizon, but we believe the exclusivity of this contract will expire in the first half of 2005,” he states in his report. “We expect Verizon will look to select a second source around this time to compete with AFC.”

Meanwhile, AFC, like Tellabs, has also been buying up access technology. Earlier this year it acquired the North American Access line of Marconi that includes fiber-to-the-curb (FTTC) gear to augment AFC’s own FTTP equipment. A FTTC contract with BellSouth represented more than half of the Marconi division’s revenue.

When the Tellabs-AFC deal is done, AFC’s Chairman and CEO, John Schofield, will become COO of Tellabs as well as a member of the board of directors. The combined company will have 4,100 employees and have research and development centers in Illinois, California, Florida, Texas and Virginia, and overseas in Denmark and Finland. The company will have sales offices in 29 countries.

Caught in the thick of telecom spending cutbacks, Tellabs went through several rounds of layoffs since 2002, and its sales have dropped from $2.2 billion in 2001 to $981 million last year.