Tut acquires Cosine

Sensing an acceleration of the telco video market--and a desire to shore up its cash position--Tut Systems announced that it has signed a definitive merger agreement to acquire Cosine Communications.

The stock-for-stock transaction, which is expected to close by the end of March, is valued at about $24.1 million. More importantly, it will put an additional $22.75 million in Tut’s cash coffers. Tut will continue supporting Cosine’s dozen or so existing customers via a third-party contract but won’t be acquiring any of the company’s employees or its facilities.

Cosine previously had laid off most of its staff and was putting its broadband delivery platform in end-of-life mode, said Sal D'Auria, chairman, president and CEO of Tut Systems. The company expects to generate minimal amounts of revenue for the product line but will take advantage of the existing customer base.

"There are a dozen or so key customers and we will look to those for additional business," D’Auria said.

Under terms of the deal, Tut will issue 6.0 million shares to shareholders of Cosine. Translated into values, it represents a 14% discount from Cosine’s Friday closing price. The deal also is subject to approval of both stockholder groups. Crescendo Ventures, which holds 8.7 percent of Cosine’s outstanding shares, already has signed off on the transaction.

The deal comes at a time when Tut, which has been generating the vast majority of its revenue from independent telcos, is seeing its opportunity among tier-one carriers expand. Late last year, the company told analysts that it could generate somewhere between $20 million and $40 million in revenue from a large telco video contract.

"We think the opportunity is bigger than that," D’Auria said. "Is it twice as big? In some cases, it could be. We believe there will be decisions made by the larger carriers in the next six months that will shape the telco TV market for a number of years to come."