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HELSINKI/NEW YORK (Reuters) - Ciena Corp agreed to buy the optical networking and ethernet equipment businesses of bankrupt Nortel Networks for $769 million after trumping a bid from Nokia Siemens Networks.
The deal, which ends a three-day auction, will vault Ciena to third place in the optical network equipment market, boosting it against bigger rival Alcatel-Lucent and Huawei Technologies Co.
But Ciena shares were down nearly 9 percent as investors worried about how the U.S. network equipment maker will integrate the new assets, which are expected to double Ciena's size, and how it will cope with an increased debt load.
Ciena agreed to pay $530 million in cash and $239 million in 6 percent senior convertible notes due 2017 for the assets.
Morgan Keegan analyst Simon Leopold downgraded his Ciena rating to "market perform" from "outperform" after the news. He said the winning bid was above his $400 million to $750 million valuation range for the assets and "appears as a win at all costs approach" from Ciena.
"We feel that Ciena is assuming too much risk and degrading its balance sheet," Leopold said. "It will take time before there's sufficient evidence to assess whether it's a success for failure."
Ciena Chief Executive Gary Smith defended the deal. "It is a large integration (but) made easier by the fact that it's such a good fit," Smith said in an interview. "It's incredibly complementary on terms of technology, people and customers."
The deal is structured to give Ciena flexibility in managing the debt it will take on, Smith added.
Pacific Crest analyst Brent Bracelin estimated that Ciena will have $1.3 billion in debt and $500 million in cash after the deal.
"It's probably a long-term positive in that it will position Ciena with the size and scope to compete," Bracelin said, but he noted that investors are disappointed that the final price was much higher than Ciena's original bid.
Last month, Ciena made a stalking-horse offer for the assets to Nortel, the Canadian company that has been auctioning off assets since it filed for bankruptcy in January.
Ciena's initial offer was for $390 million in cash and 10 million shares, for a total deal value of $522 million based on Friday's closing price of Ciena stock.
Ciena said it expected the transaction to add significantly to its results from operations in fiscal 2011. But investors are still concerned that the deal will weigh down its operations.
Ciena, which had $902.4 million revenue in its fiscal year ended October 31, 2008, will now have to swallow a business that brought Nortel annual revenue of $1.36 billion.
"In the short term, there'll be concerns about the purchase price, the combined debt burden they'll have and integration risks," Bracelin said.
The original Ciena bid set a floor price, but Nortel was free to seek higher offers. Rival Nokia Siemens, a venture of Nokia and Siemens, had teamed with private equity firm One Equity Partners and came "very close" to Ciena's offer, a source close to the deal said.
"Nokia Siemens Networks believes that its final offer represented fair value for the assets, and further bidding could not be financially justified," the company said in a statement.
Ciena sees the purchase of Nortel's Metro Ethernet Networks business as an opportunity to increase sales. The equipment supplied by both companies is used to support Internet access for corporations and consumers.
Ciena shares were down $1.17 or 8.9 percent at $12.00 on the Nasdaq at midday on Monday after the company confirmed details of the deal.
Nokia Siemens -- which is struggling to make a profit in the face of aggressive competition from Huawei -- was looking to strengthen its position in North America, one of its top four growth targets, along with India, Japan and China.
Nokia Siemens lost a similar auction in July, when bigger rival Ericsson snapped up Nortel's CDMA assets.
"Nokia Siemens should fix its market share in the United States. An acquisition would be the fastest solution for that, but integrations are costly and the company is in the midst of restructuring anyway," said Pohjola analyst Hannu Rauhala.
Nortel has yet to sell its assets related to GSM and GSM-R technologies. These assets could also interest Nokia Siemens.
Reporting by Tarmo Virki and Anupreeta Das, additional reporting by Sinead Carew in New York; editing by Jon Loades-Carter and Matthew Lewis