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Alcatel buys Newbridge for $7.1 billion

Alcatel (NYSE: ALA) made it official Wednesday and unveiled its widely anticipated plan to buy Canada's Newbridge Networks Corp. (NYSE: NN) in a deal valued at $7.1 billion.

In a statement, Alcatel, based in Paris, said the Newbridge acquisition will boost it networking ability. Alcatel said it will become a leading broadband infrastructure player with the acquisition. Newbridge is known for its asynchronous transfer mode (ATM) technology, which enables switching between voice and data transmission. ATM is expected to be replaced by Internet Protocol technology for combined voice and data.

Alcatel makes equipment for digital subscriber line (DSL) access.

Under the terms of the merger, agreed by both companies' boards, Newbridge shareholders will get 0.81 of an Alcatel American Depositary Share (ADS) for each of their own shares, valuing the deal at $7.1 billion. The deal puts Newbridge shares at $39, based on Alcatel's ADS closing price of $48-1/8.

To finance the deal, Alcatel finance director Jean-Pierre Hallbron said the company would issue new shares equivalent to 17.6 percent of its current capital.

The issue of around 35 million shares will be completed by the end of June. Worth approximately 8.1 billion euros at current share prices, it will increase the company's theoretical market value to around 54 billion euros.

No secret

The acquisition was hardly a secret. There has been widespread speculation for several weeks that the French firm was the lone suitor of the Ottawa-based networking specialist, which put itself up for sale in November after a string of disappointing quarters. Newbridge couldn't compete with networking giants such as Lucent (NYSE: LU), Cisco (Nasdaq: CSCO) and Nortel (NYSE: NT).

Ahead of the announcement, Alcatel shares have taken a hit as Newbridge rose. Alcatel shareholders were worried the company would pick up some of Newbridge's bad habits -- Newbridge has issued six profit warnings in the last 10 quarters.

Newbridge earnings

For its part, Newbridge's fiscal third quarter results put Alcatel in a good mood. Newbridge topped estimates with earnings of 13 cents a share, under U.S. accounting and excluding charges. First Call consensus called for a profit of 11 cents a share.

Revenue for the quarter ending Jan. 30 was $521 million, up 8 percent sequentially.

The company had a host of one-time items (see full statement). Charges related to acquisitions were $84 million before tax. Restructuring and severance costs associated with layoffs and facility closings were $112 million with inventory write-downs of $50 million, and net loss on investments of $138 million. The loss including one-time items was $1.19 under U.S. accounting and $1.51 a share under Canadian accounting.

The company said it had strong demand for its broadband products in the quarter.

Alcatel sees earnings boost

Alcatel Chairman Serge Tchuruk said the deal, which gave Newbridge shareholders a premium of 11 percent, would improve Alcatel's earnings slightly this year and bring substantial returns, after goodwill write-downs, next year.

The acquisition combines Alcatel's position in fast Internet access with Newbridge's strong ATM multiservice capabilities. Newbridge will merge with Alcatel's Carrier Data Division (CDD) to form the new Carrier Internetworking Division (CID), headquartered in Canada.

The move will ramp Alcatel's expected sales in this division to $2.5 billion from $1 billion. Alcatel said its earnings forecasts included $150 million of expected cost savings in 2001.