Sunday, February 01, 2015

Optical Shares Rally On Oclaro/Opnext Merger Deal

Optical networking shares are trading higher Tuesday following the announcement late yesterday that Oclaro will acquire Opnext in a stock swap. Under terms of the deal, each Opnext share will be converted to 0.42 shares of Oclaro; Opnext holders will own 42% of the combined company,.

While Oclaro shares are trading lower this morning other optical stocks are trading sharply higher in anticipation that this deal will thin down competition – and perhaps trigger additional combinations among the other players.

Pacific Crest analyst Nathan Johnson points out in a research note this morning that the combination will make Oclaro the second-largest player in the sector, behind Finisar but ahead of JDSU. He likes the deal, but sees risks for Oclaro in the near-term.

“We view consolidation as a positive for the health of the overall optical component industry,” he writes. “And we believe that the merger may ultimately represent the last, best option for both companies. However, we think that a merger of relative equals is fraught with danger even when both companies are healthy, and we think both companies were struggling before the Thailand crisis. As a result, we are concerned that integration risks are likely to understandably weigh on OCLR through the foreseeable future.”

Stifel Nicolaus analyst Patrick Newton likes the deal for Opnext. “Given effects on operations from the earthquake in Japan, flooding in Thailand, and a challenging cost structure exacerbated by movement in the Yen, Opnext was faced with a challenging task of returning operations to profitability,” he writes. “Our analysis indicates Opnext made a prudent decision to generate value for shareholders, with further potential upside if the proposed merger with Oclaro generates greater than expected synergies or industry fundamentals improve.”

Newton in a separate notes that the deal should be a long-term positive for the optical sector, with the most upside likely for JDSU and Finisar. “Our analysis indicates that the top five players in the Optical Communications industry are likely to gain share through broad product offerings and economies of scale, relegating remaining industry players to niche applications, which could ultimately catalyze more rapid consolidation and accelerate margin expansion with better utilization and pricing,” he writes.

In today’s trading:

  • OCLR is down 41 cents, or 8.8%, to $4.25.
  • OPXT is up 52 cents, or 46%, to $1.65.
  • JDSU is up 43 cents, or 3%, to $14.75.
  • FNSR is up 61 cents, or 3.1%, to $20.01.
  • Ciena is up 59 cents, or 3.7%, to $16.55.

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