JDS Laser-Plant Deal Pumps Up Nortel

Nortel

(NT)

Tuesday got a rich parting gift in exchange for its role in advancing the $17.6 billion merger of

JDS Uniphase

(JDSU)

and

SDL

(SDLI)

.

As the world's largest buyer of pump lasers, Nortel could easily have nixed the merger on the grounds that it would

consolidate production of nearly 90% of these critical optical components in the combined JDS/SDL operation. But instead of playing spoiler, Nortel agreed to pay $3 billion to buy an optical plant in Zurich -- an attractive bit of window dressing for the upcoming

IPO of Nortel's optical component business. (See

TheStreet.com's

coverage of the

merger approval.)

For Nortel, which says the deal won't reduce earnings this year, the Zurich plant brings choice pump laser expertise and the intellectual property rights to the technology. "Without doing all the arithmetic, clearly this unit has customers," Nortel's optical networks president, Greg Mumford, said in an interview Tuesday. "There are only two pump laser suppliers in the world that are shipping

these pumps in volume. ... So it does come with a very healthy business."

The technology in question is known lovingly as the 980-nanometer pump laser. The laser is an essential light-generating component in network amplifiers, which are used to shoot lightwaves through optical fiber networks. As more Internet traffic gets carried on light and more networks are built with these components, the availability of pump lasers will continue to increase in importance. That tenet was the top concern among antitrust lawyers reviewing the JDS-SDL merger, which shareholders will now vote on Feb. 12.

Nortel shares were up 45 cents, or 1%, to $36.21 in midday trading Tuesday. JDS was up more than 6% and SDL was up 8.5%, as the long-awaited deal is now all but certain of being completed.

"This is a great win for both companies, JDS and Nortel," says

CIBC World Markets

analyst

James Jungjohann, who has a strong buy on JDS. CIBC advised JDS on the merger with SDL.

Expensive precision watches aren't the only thing the Swiss make. JDS's Zurich plant supplies 40% of the world's 980 pump lasers. And by some Wall Street estimates the Zurich plant will generate about $200 million in revenue in 2001. So not only does Nortel get some immediate payback on its investment, it also gets a roster of new customers. That answers a question that had hovered over Nortel's planned optical spinoff, whose main customer has been Nortel itself.

While JDS had to sell the plant to satisfy the

Justice Department

, it's not clear how many

buyers were on hand, given the number of

delays the deal had. Nortel's looming deal-breaker status probably didn't work against it. Optical rival

Corning

(GLW) - Get Report

and Japanese manufacturer

Furukawa

were rumored to be interested as well.

But industry observers such as

RHK's

Jay Liebowitz have their doubts. Corning acquired pump laser technology with its acquistion of

Lasertron

last year and may not have needed the Zurich operation, says Leibowitz, whose firm consults to the entire optical industry.

Lucent's

(LU)

pending component business spinoff,

Agere

, could certainly have used the Zurich boost, but given the financial health of Lucent, a deal wasn't in the cards. And, says Liebowitz, Furukawa has a strong position in a competing technology -- the 1480 pump laser -- and isn't likely eager to jump into a parallel business.

For Liebowitz, the $3 billion price tag suggests Nortel got a favorable deal. Corning paid the same for

Pirelli's

optical component business late last year. And, says Liebowitz, Pirelli's unit, unlike the Zurich plant, was "not known for delivering a strong volume or the highest performing" components.