Delivering ‘dark fibre-like network’ across the UK

The combination positions Infinera to capitalise on the next wave of global network spending as network operators transform their networks to transition from 4G to 5G, from Optical Transport Network (OTN) to packet and from closed to open network architectures.

Infinera’s vertically integrated business model provides the unique ability to unleash value for customers and investors as the company’s combined network solutions power the world’s largest network operators. Ovum forecasts optical network spending to reach $17.8bn in 2022.

“Acquiring Coriant is a fantastic opportunity, strengthening our ability to serve the world’s largest network operators, accelerating our ability to leverage vertical integration and reinforcing our commitment to our long-term business model,” said Tom Fallon, Infinera CEO.

“This powerful combination immediately benefits our combined customers by delivering the innovative technology required for the next wave of network spending.”

“Joining forces with Infinera accelerates our vision of transforming next-generation networks with best-in-class innovation,” said Pat DiPietro, CEO and Vice Chairman of Coriant.

“The combined company will benefit from Coriant’s significant investments in software automation and open, disaggregated solutions, which have gained significant traction and wide-scale adoption by customers around the world.”

Strategic and Financial Rationale

• Compelling strategic logic: The scale economics of Infinera’s vertically integrated business model deliver higher performance at lower cost for our customers and higher profit margins for our stockholders. The acquisition approximately doubles Infinera’s revenue and expands the company’s customer base to serve nine of the top 10 global network operators (five new to Infinera) and the top six global internet content providers (three new to Infinera).

• Financially attractive: The acquisition is expected to be substantially accretive in 2019. This accretion will come from $100m of identified cost savings in both cost of goods sold and operating expenses. Total cost synergies of $250m are expected through 2021, with the continuation of operating synergies and the introduction of vertical integration into the Coriant product line, resulting in a step-function increase in Coriant’s margins. Infinera will be acquiring a debt-free balance sheet and expects cash flows to pay back transaction consideration within three years.

• Innovation to benefit customer networks: Coriant invested nearly $1bn in research and development over the last five years to significantly advance its portfolio to address the growing demand for software automation and open, disaggregated platforms. Infinera recently upgraded its portfolio based on the innovative Infinite Capacity Engine (ICE4). Combining the strengths of both companies creates a powerful new portfolio to support our customers’ transition from 4G to 5G, from OTN to packet and from closed to open network architectures.

Transaction Details

Under the terms of the definitive purchase agreement governing the acquisition, subject to customary adjustments, Infinera will pay approximately $150m in cash at closing, and estimated additional amounts of $25m in the two quarters post-closing and $55m over a period of years. Infinera will issue approximately 21 million shares, which when combined with the cash consideration, results in total transaction consideration of approximately $430m. Confident in the combined company’s opportunities, Coriant’s majority owner, Oaktree Capital Management (“Oaktree”), expressed an interest in being compensated for this transaction largely in stock. Post-transaction, Oaktree will own approximately 12% of the combined company on a fully diluted basis. Pursuant to the terms of the definitive purchase agreement, Oaktree has agreed to lock up 50% of its shares for six months post-close and the remaining 50% of its shares for 12 months post-close.

To fund the cash requirements of this transaction, and to support future working capital requirements, Infinera plans to pursue debt financing. Morgan Stanley Senior Funding, Inc. has committed to provide debt financing for the transaction, subject to customary conditions.

The acquisition is expected to close in the third quarter of 2018, subject to customary closing conditions. The board of directors of Infinera has unanimously approved the transaction.

Morgan Stanley & Co. LLC served as financial advisor and Wilson Sonsini Goodrich & Rosati, P.C. served as legal counsel to Infinera on this transaction. Moelis & Company served as financial advisor and Kirkland & Ellis served as legal counsel to Coriant.

Preliminary Second Quarter 2018 Results

Infinera will provide its second quarter results and commentary on its Q2 earnings call on August 7, 2018.  Preliminarily:

• Revenue is expected to be slightly higher than the midpoint of our previously reported guidance range

• GAAP gross margin and non-GAAP gross margin are expected be at the high end of our previously reported guidance ranges

• GAAP operating expenses and non-GAAP operating expenses are expected to be in line with the midpoint of our previously reported guidance ranges

• GAAP operating margin and non-GAAP operating margin are expected to exceed our previously reported guidance estimates