First Berlin – ADVA Optical Networking SE Research Update (02/09/2021)

First Berlin Equity Research has published a research update on ADVA Optical Networking SE (ISIN: DE0005103006). Analyst Simon Scholes reiterated his ADD rating and maintained his EUR 14.40 price target.

Abstract
The proposed merger of ADVA and Adtran brings together two fibre optic edge networking specialists in the second year of an edge network investment boom which looks set to continue into the second half of this decade. Combined last twelve months sales and adjusted EBITDA of the two companies are USD1.2bn and USD131m respectively. The shift towards home-based work and leisure caused by the pandemic acted as the initial trigger for accelerating investment at the network edge. The roll-out of 5G, the growth of the Internet of Things, the replacement of Huawei infrastructure and government stimulus programmes are now adding fuel to the boom. ADVA and Adtran are both edge networking specialists but Adtran is focused on the ?first mile? of the network (from the end-user's perspective) with state-of-the art solutions for residential access, while ADVA is offering first-mile solution for enterprise users and is strong in the ?second mile?. There is little product overlap between the two companies. Synergies arising from the merger, estimated by management at USD52m pretax are expected mainly from savings on component purchasing. This figure does not include cross-selling benefits which should be substantial given the complementarity of the two companies' product ranges and geographic strengths (ADVA in Europe and Adtran in the US). Under the merger's proposed terms, each ADVA shareholder will receive shares in the new company equivalent to 0.82x the value of each Adtran share. Adtran shares will be converted one-to-one into shares in the new entity. ADVA and Adtran shareholders will receive 46% and 54% respectively in the new company. The merger is dependent on a minimum acceptance of 70% of outstanding ADVA shares as well as regulatory approval. Closure is expected in Q2 or Q3 2022 if these conditions are met. Pending closure, our forecasts are for ADVA on a standalone basis. At the current Adtran share price, ADVA shareholders will receive shares in the new company worth €14.41 per existing ADVA share. Given the merger's compelling business logic, we see little risk that the transaction will not go ahead. We maintain our Add recommendation and €14.40 price target.