Corning snaps up Pirelli for $3.6 bln

Corning Inc. (NYSE:GLW) said Wednesday it will buy Pirelli's optical components and devices business for about $3.6 billion.

Shares in Corning closed at 325 Tuesday. Pirelli, based in Italy, is a leading manufacturer of lithium niobate modulators, pump lasers, certain specialty fibers and fiber gratings used in optical networks.

A report from Merrill Lynch Tuesday said a recent trip to Corning's headquarters reinforced its view that results for 2000 and 2001 will impress investors, and that Corning is "one of only a few premier, blue chip plays on fiber optics."

The photonics and fiber businesses appears sold out throughout 2001, and capacity expansion and streamlining in the telecommunications segment, which accounts for 70 percent of sales, are on or ahead of plan, the note said. Assuming current momentum, the firm's price target for Corning is $400 a share. That was before Wednesday's announcement of the Pirelli acquisition, which is expected to increase Corning's capacity, and add to earnings by 2002.

Under the terms of the deal, Corning will pay about $3.6 billion in cash for all of Pirelli S.p.A's 90 percent interest in its optical business. The remaining 10 percent is owned by Cisco Systems, Inc. (Nasdaq: CSCO). Corning will make an initial payment of $3.4 billion, and may make a contingent payment of $180 million upon the achievement of certain business milestones. Corning expects to finance the purchase from the issuance of a combination of equity and convertible debt securities. The transaction will be accounted for as a purchase, and Corning will take a charge for acquired in-process research and development. The goodwill associated with the deal will be amortized over 5 to 10 years.

The investment is expected to dent Corning's earnings per share in 2001 by less than 5 percent, and will add to earnings thereafter. Pro forma earnings exclude amortization of purchased intangibles and goodwill, purchased in-process research and development, one-time acquisition costs, discontinued operations and other non-recurring items.

In a conference call with analysts, Corning chief financial officer James B. Flaws said he sees revenue around $80 million next year, and over $1 billion by 2004. He added that those numbers are based on an expected expansion in customer base; all Pirelli's sales had been previously been to Cisco. Pirelli's business is not now profitable, but will be by next year, Flaws said.

Corning said it was buying the company because it needed the capacity now to meet its customer demands. It is acquiring no new fiber technology.

The acquisition is expected to close by the end of the fourth quarter of 2000.