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Tellabs to Go Private

Zacks Equity Research

Yesterday, telecom equipment manufacturer Tellabs Inc. (TLAB) declared that the company has entered into a definitive merger agreement with private equity firm, Marlin Equity Partners, which will acquire all outstanding shares of Tellabs for $2.45 per share in cash. The total deal size will be approximately $891 million.

This deal is expected to close by the fourth quarter of 2013 and is not subject to a financing condition. Tellabs currently has a Zacks Rank #3 (Hold).

Tellabs has incurred losses for the last 11 straight quarters and is not expected to achieve profitability in the just concluding third quarter of 2013, for which the results will be declared on Oct 31. The company has lost its major customer AT&T Inc. (T) and its ongoing business with Verizon Communications Inc. (VZ) is also dwindling.

Tellabs is facing severe competitive threat from larger network gear makers, such as Cisco Systems Inc. (CSCO), Huawei Technology Co. Ltd. and Alcatel-Lucent SA.

Another key challenge for Tellabs is to sustain business growth as economic headwinds still persist in several parts of the world, especially in Europe. Tellabs is striving to expand its geographic presence while emphasizing on Brazil, Russia, India, China and South Africa. However, this strategy exposes the company’s top line to foreign exchange volatility and may result in revenue fluctuations.

Tellabs’ globally reputed high-margin 5000 series digital cross-connect products continue to show a downtrend. Management is targeting the growing mobile Internet market since the company’s legacy switching products are quickly losing relevance.

Tellabs is emphasizing on mobile backhaul solution, IP-packet optical solution and Insight Analytics Services. However, the global macroeconomic fluctuations may hinder its speed of recovery.

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