Redback Rallies as Nokia Spreads Bets - TheStreet

Updated from 10 a.m. EDT



jumped 16% Wednesday as cellphone


(NOK) - Get Report

took a 10% stake in the broadband equipment outfit.

The deal will help Nokia expand its wireline broadband business as it seeks to offset its declining market share in wireless handsets and network gear. For its part, Redback is aligning with a powerful player in the networking and telecom industry as consolidation shifts the balance of power.

Nokia and Redback have been the subject of merger rumors over the last week and a half. During that span Redback shares nearly doubled, from around $1.50 last Monday to $2.77 early Wednesday. Just after midday the stock was up 35 cents at $2.62.

"This cooperation and shared vision of the network evolution will deliver immediate benefits of an expanded product portfolio and integrated support services to cusomters of both Nokia and Redback," said Nokia Broadband Systems exec Ari Lehtoranta. The two companies plan to create several joint technology initiatives, they said, including "linkages of products in the DSL and wireline intelligent edge market."

Under the deal, Nokia will buy 17.7 million shares at $2.20 each in a deal valued at $36 million. Nokia will take an option to nearly double its stake in Redback, a small router maker whose name has been almost whimsically included in takeover rumors ever since the Internet building bubble burst about 18 months ago.

Nokia is aiming to offset declining sales in its networks division as carriers transition from 2G systems to 3G. In its first quarter, the company reported revenue in the division declined 29% year-over-year. It expects business to pick up in the second half as more companies are expected to make the transition to higher-speed systems.

To be sure, the deal today does not affect Nokia's wireless infrastructure business -- only its wireline broadband business. Nokia was particularly attracted to Redback's edge network routers, which sit near the exit ramps of the Internet.

Rumors of a deal swept through Wall Street last week, goosing Redback shares. Redback, whose shares have lost more than 80% of their value over the last year amid an industrywide spending slowdown, evidently realizes it must strike strategic partnerships to stay afloat. Last week, competitor

Juniper Networks

(JNPR) - Get Report

snapped up Siemens unit Unisphere last week for an estimated $740 million.

In a conference call with analysts this morning, the two sides said the deal will help them combine their sales and distribution teams and help Redback gain new clients in Asia and Europe.

Redback CEO Kevin DeNuccio said the deal will give Redback a thirst-quenching cash infusion in order for it reach its projected EBITDA breakeven with some measure of "financial security" in the fourth quarter.