Tekelec takes Santera under its wing

Proclaiming it is a matter of when, not if, next generation network will be deployed, Tekelec CEO Fred Lax announced yesterday the proposed merger of his signaling and packet telephony company with Santera, a Plano, Texas-based maker of next generation switch technology.

“This merger creates a next generation business with the product portfolio, operational expertise, global reach and financial strength to become the preferred switch solution worldwide,” Lax said.

The structure of this merger, which looks very much like an acquisition, will make Santera a majority-owned subsidiary of Tekelec. Santera will put all of its assets and $12 million in cash into the new subsidiary for a 48% ownership. Tekelec will contribute $28 million in cash and the assets of its packet telephony business for a 52% ownership stake. David Heard, CEO of Santera will become president of the new subsidiary.

Tekelec can increase its ownership of Santera to 62.5% and maintains the option to purchase the remaining interest between July 1, 2005, and Dec 31, 2007.

In what appears to be a low-risk venture for Tekelec, the company will hold senior preferred securities, while Santera holds junior preferred securities. This protects Tekelec from certain losses by having them absorbed first by Santera’s junior securities.

However, Lax said that accounting did not drive the transaction structure, that it was the result of long negotiations. “Tekelec brought to the table the credibility of the Tekelec brand, a strong balance sheet and distribution channel. In return we wanted senior secured securities. At the end of the day we felt we were entitled to it,” Lax said.

Tekelec expects the transaction to dilute 2003 and 2004 earnings per share and to be accretive by 2005. The company currently has $315 million in cash and cash equivalents of which $28 million is earmarked for this transaction.

Lax said the merger demonstrates Tekelec’s commitment to next generation packet switching. “The majority of analysts and industry participants agree that when the market does develop it will offer substantial opportunity to those equipment suppliers that offer the right product innovations with carrier grade reliability, something we believe Tekelec, through our new subsidiary, Santera, will be uniquely positioned to do,” he said.

While some analysts see redundancy in the two companies’ packet telephony platforms, their leaders say there isn’t that much overlap. Santera’s SanteraOne integrated voice and data-switching solution is designed for both Class 4 and Class 5 applications, but it has seen most traction with Class 5 applications, Lax said. Tekelec, which specialized in signaling solutions, has seen more Class 4 tandem applications for its packet telephony business.

Heard said the 25-year turnover cycle of switch networks is currently underway and at the same time there is global demand for migrating from circuit to packet technologies. “With Tekelec’s experience worldwide in signaling networks [there is] a lot of synergy with what is required when developing next generation switch services country-to-country,” he said.

The companies will announce a product roadmap shortly after the deal closes, Lax said. Tekelec introduced its GenuOne next-generation platform last month at CTIA. GenuOne delivers call control, signaling, applications, media processing, and operations management for TDM, ATM, and IP including H.323 and SIP networks. The platform, coincidentally named similarly to the SanteraOne product line, will be generally available in May.

“We both believe in an open, standards-based approach where any of our next generation components can operate in a single [vendor] or multi-vendor environment,” Lax said.