Is ADVA Optical Networking looking to buy ECI Telecom?

Is ADVA Optical Networking preparing a bid for private company ECI Telecom? The latest consolidation rumour involving the two mid-tier metro players comes after Infinera’s announcement that it is acquiring Coriant, a deal that is expected to close this quarter. 

According to a source in the financial sector, ADVA wanted to acquire Coriant but failed to raise the required funds. Infinera’s successful bid for Coriant has led ADVA to consider alternatives as it looks to secure its future in a consolidating marketplace, with ECI Telecom being viewed as an attractive target. 

ECI Telecom is reportedly considering an initial public offering (IPO) on the London Stock Exchange to raise $170 million. A source close to ADVA confirmed that ‘ECI is looking for a home’ but declined to comment on whether ADVA is involved. Another source close to ADVA suggested that there may be some truth in such a bid.

ADVA declined to comment. 

An ECI spokesperson said the company has issued no statement regarding an IPO and expressed surprise when asked if ECI was looking to merge. The spokesperson declined to comment when asked about ADVA acquiring ECI. 

I wouldn't doubt that there are talks going on, I just don’t know how far they are. And, of course, things can always fall through.

If ADVA and ECI are in discussions, they are doing a good job keeping it quiet. This contrasts with Coriant where rumours started to circulate before the deal was announced.     

Mike Genovese, managing director and senior equity research analyst at MKM Partners, who broke the news that Infinera was acquiring Coriant, has no knowledge of any ADVA deal. But he says such a deal fits the industry trend of vendors looking for scale and combining to focus their R&D resources on coherent optics. 

Another financial analyst, George Notter, managing director, equity research, telecom and networking equipment analyst at Jefferies, is also unaware of any deal. 

“It is a plausible concept,” says Sterling Perrin, principal analyst, optical networking and transport at Heavy Reading. He can see why ADVA is looking and why ECI might be a good fit. “I wouldn't doubt that there are talks going on, I just don’t know how far they are,” says Perrin. “And, of course, things can always fall through.”

Acquisition benefits 

Perrin points to ADVA’s Euro 111 million ($131 million) revenues in 3Q 2017, a drop from its Euro 144 million ($165 million) revenues reported in the previous quarter. 

ADVA attributed the drop in revenues to two major customers, one an internet content provider (ICP) and the other a large US carrier that was going through a merger. Amazon was the ICP, with ADVA losing some business to Ciena, says Heavy Reading. ADVA’s quarterly revenues have still not returned to their former levels. 

“It made ADVA think of how they are going to replace that [business] going forward,” says Perrin. “The webscale business that they bet so heavily on is very competitive, and as they learned with Amazon, the customers are not very loyal.”

By acquiring ECI, ADVA would gain a packet-optical transport platform, a product it lacks, as well as a presence in new markets. ECI has benefitted in recent years from the growing telecom market in India. “Half of ECI’s revenues are coming from Asia, most of that being India,” says Perrin. In contrast, ADVA’s Asian business accounts for over 10 percent of in revenues. 

The two firms overlap in wavelength-division multiplexing equipment but not in the data centre interconnect market.

“ADVA might be looking for a land grab and to essentially double down in traditional telecom to make up for losses on the webscale side,” says Perrin. 

ADVA’s optical revenues in 2017 were $370 million while Heavy Reading estimates ECI’s optical revenues were $350 million last year

Mature market 

Optical transport equipment has become a mature market with fewer than a dozen players remaining. Outside of Asia, the main players are Ciena, Nokia, Cisco, Infinera-Coriant, ADVA and ECI Telecom.  

ADVA reported revenues of Euro 514 million in 2017 ($617 million). Heavy Reading says the two companies’ optical revenues are comparable: ADVA’s optical revenues in 2017 were $370 million while Heavy Reading estimates ECI’s optical revenues were $350 million last year. To put that in perspective, market leader Huawei’s optical revenues were $4 billion in 2017.

Both Coriant and ECI are privately held but Perrin says the fortunes of the two firms are very different.

Coriant was a company in decline which explains why its owners, Oaktree Capital Management, was keen for its sale. “ECI is doing really well right now,” says Perrin. ECI's revenues grew over 15 percent in 2017 compared to 2016 and the growth has continued this year. “Which is why you are hearing rumours of them floating publicly.” 

ECI is thus in a strong position in any potential negotiations.

Comments

[Jack Abramson]

In a sentence, until Mr. Shani returns the market confidence in ECI products, shows a real growth in a global manner and shows real revenue, ECI will be considered as a 2nd or 3rd tier telecom company that even its workers have stopped believing in. (A reminder, the strike they undertook last January.)