Tellabs, AFC revise terms of merger

Tellabs and Advanced Fibre Communications have amended the terms of the merger agreement they originally announced in May, Tellabs announced Tuesday afternoon.

Under the new terms approved Tuesday, AFC stockholders will receive 0.504 shares of Tellabs common stock and $12 cash for each AFC share. The original deal gave AFC investors 1.55 Tellabs shares and $7 cash for each AFC share. Based on stock prices at the close of trading today, the new exchange ratio represents $16.60 per AFC share, making the total value of the deal about $1.5 billion, Tellabs said. The previous value was about $1.9 billion.

When the deal closes, Tellabs stockholders will own about 90% of the combined company, while AFC investors will own about 10%. The original terms would have given Tellabs shareholders about 75% of the combined company and AFC investors about 25%.

“Both companies agreed that it was in our mutual interest to revise the deal terms,” AFC CEO John Schofield said in a Tellabs press release. “Our stockholders will receive a larger proportion of the merger consideration in cash while participating in the anticipated strategic benefits of the merger.”

Tellabs will hold a conference call Wednesday morning to discuss the changes.

During AFC’s second-quarter earnings conference call in July, Schofield revealed that Verizon Communications, a customer of AFC’s fiber-to-the-premises equipment, had declared AFC in breach of its supplier contract due to some missed “milestones.” Besides mentioning a $1 million penalty surrendered by AFC as a result of the breach, Schofield did not offer specifics on any consequences of the breach, which prompted analysts to question whether the breach was significant enough to allow Tellabs to alter the terms of its merger agreement. Tellabs’ board of directors requested an updated review of AFC’s finances after AFC’s second-quarter earnings call.

“AFC's performance over the past few months has been clearly disappointing," Lehman Brothers analyst Steve Levy wrote in July following that earnings call. He cited revenues that fell short of expectations two quarters in a row, in Levy’s view, largely due to the company’s own execution problems.

In July Schofield called AFC’s most recent quarterly revenue numbers "somewhat below what we have anticipated," blaming three factors: a supply constraint of a key FTTP equipment component, a "large customer workforce issue" (probably labor negotiations at SBC) that limited order flow from that customer, and the timing of some international orders. Also, he added, many independent telcos interested in offering video were taking time to evaluate various technology options, which delayed purchases.