Corning Inc. said today it will acquire Pirelli S.p.A.'s optical components business for $3.6 billion in cash, adding lithium niobate modulators to its product portfolio and boosting its manufacturing capacity with the addition of the European operation.
Corning will be getting Pirelli's 90% stake in the Milan, Italy, optical-components business and said it expects to finance the acquisition through a combination of equity and convertible debt securities.
The acquisition comes at an opportune time for Corning. The company and its major competitors in the optical components business are operating at full capacity and adding manufacturing facilities to meet surging demand.
Corning's "core photonics business, which should approach sales levels of $1 billion in 2000, is most likely sold out at least through 2001 in all product areas," said Steven Fox, an analyst with Merrill Lynch & Co., New York. "Additionally, the company's fiber business remains sold out and visibility here is excellent for at least the next 12 months."
Besides the additional manufacturing and engineering facilities it will gain from the Pirelli acquisition, the deal also gives Corning an opportunity to further strengthen its relationship with Cisco Systems Inc., San Jose, which owns 10% of the Milan plant and is already one of Corning's major customers.
By 1999 revenue, Corning is the No. 4 supplier of optical components and stands to improve its position within the industry with this acquisition, company executives said.
"The acquisition of Pirelli's active component technologies and products significantly adds to our capabilities in the transmission segment of the optical layer," said Roger Ackerman, Corning's chairman and chief executive.
Pirelli, like many other telecommunications OEMs, is streamlining its operations and disposing of businesses considered outside of its core activities. Analysts said they expect the pace of OEMs' divestiture of in-house optical components operations to accelerate in the next months.
The "industry consolidation and the planned optical component business divestitures by major telecom OEMs (Alcatel, Lucent and possibly Nortel) should be viewed as net positives for Corning," said Merrill Lynch's Fox.
By selling the Milan facilities to Corning, with which it already has a long-standing relationship, Pirelli also gains much-needed cash for continued expansion in other areas of its operations.
"Pirelli will reinvest the proceeds to further enforce its strategic role in its core businesses: telecommunications, energy transmission and tires, capturing opportunities to create additional value," said Marco Tronchetti Provera, chairman and chief executive of Pirelli.