STOCKHOLM (Reuters) - Ericsson AB’s $2.1 billion acquisition of data network equipment vendor Redback Networks is a costly one but analysts said on Wednesday it was strategically sound and should bolster the Swedish player’s product offering.
Ericsson (ERICb.ST)(ERIC.O) late on Tuesday announced plans to buy San Jose, California-based Redback RBAK.O for $25 cash a share, an 18 percent premium to Redback’s Tuesday’s closing stock price of $21.17.
Greger Johansson, analyst at Swedish equities research firm Redeye, said the price for Redback was steep, although he saw it as a good move that would grow Ericsson’s competencies.
“They are paying a lot, but looking a few years ahead it may not be bad. Ericsson has a lot of customers and can get good sales synergies which still motivate the acquisition,” he said.
Redback, founded in 1996, was a high-flying stock in the late 1990s technology bubble. Its rivals include Juniper Networks Inc. JNPR.O and Cisco Systems Inc. (CSCO.O).
Ericsson said the transaction, expected to close early next year, would be internally funded and would broaden its reach in the hot market of next-generation Internet Protocol networks.
“The price reflects the future,” Ericsson Chief Executive Carl-Henric Svanberg told Reuters. “Redback does not have anything unique which we would not be able to develop on our own over two to three years, but now we get to the market faster and our offering becomes more complete.”
Svanberg said the deal would have a very minor negative impact on earnings per share next year.
Prudential Financial said the possibility Ericsson could buy Redback had been talked about for a while and the deal should ease investor worries about a bigger, more dilutive purchase.
“We believe this acquisition is strategically important for Ericsson and positions the company as a strong contender for AT&T’s IPTV (television over IP) initiative as well, where it has had an ongoing trial,” Prudential wrote in a research note.
Ericsson shares closed 1.3 percent higher at 27.90 crowns on the Stockholm bourse while Redback was 18.5 percent higher at $25.08 on Nasdaq as of 1630 GMT.
One telecommunications analyst, who declined to be identified, said Ericsson was paying roughly seven times Redback’s annual sales.
Before the deal, Redback traded at 5.4 times projected 2006 sales and 54 times forecast earnings. The company’s sales are seen surging nearly 80 percent this year, with growth in 2007 and 2008 of 23 and 31 percent, respectively, according to Reuters Estimates.
The deal values Redback at 39 times projected 2007 earnings per share before items, according to Reuters Estimates. Rival Juniper trades at 22 times projected 2007 per share profits per share before items. Ericsson trades at a price-to-earnings ratio of 15.3 times forecast 2007 profit, versus 21.4 times fiscal 2007 earnings for Cisco.
The acquisition is part of a larger trend toward telecom equipment players widening their scope to cover all aspects of communications equipment — from the network core to the edge, mobile and fixed lines alike.
Redback’s data-routing technology helps service providers offer broadband, telephone, television and services over networks using standard Internet infrastructure, the firms said.
Redback will keep its current management team and operate as a wholly owned Ericsson subsidiary.
The total market for IP edge routing, Redback’s main market, is forecast to top $5 billion by 2009, according to research firm Yankee Group.
Ericsson and Redback said they saw an opportunity to upgrade some 2 billion wired and wireless users globally over the next 10 years to IP-based broadband networks and infrastructures.
Additional reporting by Per Danielson in Stockholm and Lucas van Grinsven in Amsterdam