Antec Corp. agreed to buy out Nortel Networks' 81.25-percent interest in Arris Interactive LLC, which makes cable modems, cable-modem termination systems, cable-telephony equipment and other broadband cable-access gear.
Antec, which owns about 18.75 percent of Arris, would rename itself Arris Inc. once the deal closes early next year.
Nortel would receive 33 million shares of common stock in the new company, plus $325 million in cash. Nortel would be Arris Inc.'s biggest shareholder, with 46.5 percent equity. Antec and Nortel started Arris in 1995.
Antec chief executive officer Bob Stanzione wants the deal to unlock value from Arris, whose results are typically hidden or buried in Nortel and Antec statements.
"We'll take Arris public and expose its true value," Stanzione said.
Arris has sold circuit-switched and Internet protocol-based cable telephony gear to AT&T Broadband, Adelphia Communications Corp., Insight Communications Inc., Cox Communications Inc., Cablevision Systems Corp. and Time Warner Cable.
VTR in Chile, CTC in Spain and Jupiter Telecommunications Co. in Japan also buy Arris' Cornerstone-branded gear.
"In essence, the transaction makes sense from both sides," Josephthal & Co. Inc. analyst Lawrence Harris said. "Nortel has been indicating it would like to focus on backbone products, particularly optical systems. The cable-telephone business has enjoyed lower margins than what Nortel is used to."
Antec took a big hit after the deal was announced last Wednesday, losing about 40 percent of its share price, dropping by $7.88 to $12.06.
But Antec also reported a third-quarter profit of 20 cents per share, below analyst forecasts of 32 cents per share.
Stanzione blamed such factors as low broadband equipment margins and a shortage of fiber cable that interrupted network construction in some places. The company also had to temporarily turn away some business, he said, creating a backlog it hopes to rectify soon.
Harris said Antec's earnings shortfall was characteristic of the sector.
"The sector has underperformed and certainly Antec is one of the stocks that has gone down," Harris said. "Investors had been concerned because of the uncertainty at AT&T and AT & T's capital spending. It turned out that those concerns were valid."
Harris said the Antec results show that cable operators are backing off telephony and concentrating on revenue-generating businesses like digital cable and high-speed data. He pointed to a falloff in Antec's optical and broadband sector.
"We may be going through a transitional phase now, where the cable operators are saying 'We've done a certain level of upgrading, now we want to generate some revenue to pay for those upgrades,'" Harris said. "Maybe a couple of quarters hence, if the networks get too congested, they may go back to the transmission spending."