Zhone, Tellium merge

Equipment vendors Zhone Technologies and Tellium have signed a definitive merger agreement, the companies announced today.

Under the terms of the stock-for-stock agreement, Zhone investors would receive 60% of the combined company’s outstanding shares upon closing, and Tellium investors would hold the remaining 40%.

The combined company would retain Zhone’s name as well as its CEO, Mory Ejabat. It will have $150 million in cash and more than 250 carrier customers on six continents, the companies said. This spring Tellium said it ended the first quarter with about $157.2 million in cash.

The merger adds another name to Zhone’s string of acquisitions, which includes NEC Eluminant Technologies in February, Vpacket last summer and Nortel’s digital loop carrier (DLC) product lines in 2001. The Tellium merger would give Zhone, which has focused heavily on the access space, a complementary cross-connect product line.

“They’ll argue that we’re at a time when service providers are working to get the best first-cost possible and by offering a wider portfolio, it gives them more sales power,” said analyst Mark Lutkowitz of Telecom Pragmatics. “But neither Tellium nor Zhone has really established itself in a big way, so you have to take that argument with a grain of salt. I think this new entity might make an even better acquisition candidate because they’re offering both access and core [products].”

In 2002, Zhone’s share of the DLC market shrank from 11% to 8%, according to RHK and Lehman Brothers estimates. And although Tellium CEO Harry Carr said the company’s revenues had “turned a corner” in the first quarter of 2003 when they rose to $10.1 million, the company also reported a net loss of $37.4 million and a quarterly cash burn of $13.8 million. Analysts say Tellium also faced intense competition from rival vendors such as Ciena.

The two companies will host a conference call later today to discuss details.