Equity Firms to Buy Avaya For $8.2B

UPDATED: It’s official. Avaya  said today it has agreed to merge with private equity firms Silver Lake and TPG Capital for $8.2 billion on $17.50 per share, a deal that underscores the strong interest in gear that routes voice, video and other data across networks.

Avaya said in a statement its board of directors has approved the merger agreement and recommends that Avaya shareholders adopt the agreement.

“In addition to delivering compelling value for our shareholders, the partnership with Silver Lake and TPG also creates clear value for Avaya employees and customers,” said Avaya President and CEO Louis J. D’Ambrosio.

Silver Lake and TPG are paying a premium of 28 percent over Avaya’s closing share price of $13.67 on May 25, the last trading day prior to published reports regarding a potential transaction; the Wall Street Journal reported talks of the deal May 29.

That report came after buy-out discussions with networking gear rival Nortel Networks  and Cisco Systems  hit the wall, according to the Journal.

Indeed, Silver Lake and TPG may have thwarted the best-laid plans of Microsoft , Nortel, Cisco and IBM ; Avaya’s assets could have significantly fortified these companies’ plans to offer voice, e-mail, Web conferencing, instant messaging and video as integrated suites of collaboration tools they call “unified communications.”

But it may be just as well. Forward Concepts analyst Will Strauss said if Cisco or Nortel tried to buy Avaya, it would have a tough time surviving monopoly scrutiny.

“Maybe (Alcatel-) Lucent should buy them back? After all, Avaya seems to have done better than its former parent,” Strauss said.

While Avaya was cagey about merger discussions, signs indicated something was up. Avaya, which was spun off from Lucent in 2000, postponed its analyst meeting scheduled for May 31 without giving a reason for the delay.

Today’s merger deal isn’t a classic bailout, as Avaya is enjoying a state of positive cash flow.

Avaya, which boasts a market capitalization of $6.18 billion, had a profit of $220 million on revenue of $5.2 billion for its fiscal year 2006. In its most recent quarter, the company posted $57 million in net income on earnings per share of 13 cents.

“My guess is there’s too much money lying around, looking for a safe place to stay and eventually get a good return,” Strauss offered. “And the Avaya executive suite likely gets to cash out all of their stock options at the time of the sale… so they wouldn’t object to a buyout.”

The merger is expected to be completed in the fall of 2007, though the merger agreement allows Avaya to solicit proposals from third parties during the next 50 days.

The market for networking gear has enjoyed several cycles of consolidation in the years since the high-flying, high-tech well began to dry up in 2001 and 2002.

Alltel, the nation’s fifth-largest mobile carrier, agreed to a $27.5 billion cash buyout from investment firms TPG Capital and GS Capital Partners (GSCP) last week.

Mitel agreed to buy Inter-Tel for $723 million last month. And French giant Alcatel bought Lucent for $13.4 billion last year.