News: Optoelectronics
1 July 2024
Nokia to acquire Infinera for $2.3bn, boosting in-house optical technology and vertical integration
Infinera Corp of San Jose, CA, USA — a vertically integrated manufacturer of open optical networking systems and optical semiconductors — has agreed to be acquired by Finland-based Nokia for $6.65 per share (an enterprise value of $2.3bn), representing a premium of 28% to Infinera’s share price at the close of 26 June and a 37% premium to the trailing 180-day volume-weighted average price (VWAP).
At least 70% will be paid in cash and Infinera’s shareholders can elect to receive up to 30% in the form of Nokia American Depositary Shares (ADSs) at 1.7896 Nokia shares per Infinera share. Each shareholder can alternatively choose a combination of $4.66 in cash and 0.5355 Nokia shares for each Infinera share.
Also, to mitigate any dilution from the equity component of the acquisition, Nokia’s board of directors has committed to increase and accelerate Nokia’s on-going €600m share buyback program. At or around the time of closing of the transaction Nokia will repurchase Infinera’s outstanding convertible notes for an estimated $760m (including change of control costs), which is already considered in the $2.3bn enterprise value.
Nokia and Infinera see a significant opportunity in merging to improve scale and profitability, enabling the combined business to accelerate the development of new products and solutions. The transaction aligns with Nokia’s strategy, as it is expected to strengthen its optical technology and increase exposure to webscale customers (the fastest-growing segment of the market).
The combination with Infinera is projected to accelerate Nokia’s progress to double-digit operating margin in its Optical Networks business. Assuming that the transaction closes during first-half 2025, Nokia aims to achieve €200m of net comparable operating profit synergies by 2027 (about one third from cost of sales due to supply chain efficiencies, and the remainder from operating expenses due to portfolio optimization and integration along with reduced product engineering costs and standalone entity costs). Nokia expects one-time integration costs of about €200m.
Along with its recently announced sale of Submarine Networks, Nokia says that the acquisition of Infinera will create a reshaped Network Infrastructure built on the three pillars of Fixed Networks, IP Networks and Optical Networks. Nokia targets mid-single-digit organic growth for the overall Network Infrastructure business and to improve its operating margin to the mid-to-high teens level.
The transaction is also expected to be accretive to Nokia’s comparable EPS in the first year post-close and to deliver over 10% comparable EPS accretion by 2027, with a return on invested capital (RoIC) comfortably above Nokia’s weighted average cost of capital (WACC).
“In 2021 we increased our organic investment in Optical Networks with a view to improving our competitiveness. That decision has paid off and has delivered improved customer recognition, strong sales growth and increased profitability,” says Nokia’s president & CEO Pekka Lundmark. Nnow is the right time to take a compelling inorganic step to further expand Nokia’s scale in optical networks. The combined businesses have a strong strategic fit, given their highly complementary customer, geographic and technology profiles,” he adds.
“Network Infrastructure offers a unique portfolio across the fixed access, optical and IP networks domains built on leading technology innovation and a strong customer focus. This acquisition will further strengthen the optical pillar of our business, expand our growth opportunities across all our target customer segments and improve our operating margin,” believes Federico Guillén, president of Network Infrastructure at Nokia.
“Together we will have greater scale and deeper resources to set the pace of innovation and address rapidly changing customer needs at a time when optics are more important than ever – across telecom networks, inter-data-center applications, and now inside the data center,” says Infinera’s CEO David Heard. “This combination will further leverage our vertically integrated optical semiconductor technologies. Furthermore, our stakeholders will have the opportunity to participate in the upside of a global leader in optical networking solutions.”
Nokia lists strategic benefits of the acquisition as follows:
- Improving global scale and product roadmap: The combination will increase the scale of Nokia’s Optical Networks business by 75%, enabling it to accelerate its product roadmap timeline and breadth.
- In-house capabilities will include an expanded digital signal processor (DSP) development team, expertise across silicon photonics and indium phosphide (InP)-based semiconductor materials, and deeper competency in photonic integrated circuit (PIC) technology.
- Gaining scale in North America optical market: The two companies have limited customer overlap, putting the combined business in a strong position in all regions (excluding China), it is reckoned. The North America optical market comprises ~60% of Infinera’s sales, which will improve Nokia’s optical scale in the region and complement Nokia’s strong positions in APAC, EMEA and Latin America.
- Building on Nokia’s commitment to investment in US-based manufacturing and advanced testing and packaging capabilities.
- Accelerating Nokia’s expansion into enterprise and particularly webscale: Combination of the two businesses is also expected to accelerate Nokia’s strategic goal of diversifying its customer base and growing in enterprise. Internet content providers (ICP, or webscale in Nokia’s terminology) comprise over 30% of Infinera’s sales. With recent wins in line systems and pluggables, Infinera is well established in this fast-growing market. Infinera has also recently been developing high-speed and low-power optical components for use in intra-data-center (ICE-D) applications, which are particularly suited to AI workloads which can become a very attractive long-term growth opportunity. Overall, Nokia reckons that the acquisition offers an opportunity for a step change in its penetration into webscale customers.
The acquisition has been unanimously approved by the board of directors of both Nokia and Infinera. It is targeted to close during first-half 2025, subject to approval by Infinera’s shareholders, regulatory approvals including anti-trust, CFIUS (Committee on Foreign Investment in the United States) and other foreign direct investment approvals and other customary closing conditions.
Oaktree Optical Holdings L.P., which owned about 11% of Infinera’s common stock as of 27 June, has agreed to vote their shares in favor of the transaction.
