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Commentary

Xtera Communications Files for Chapter 11, Seeks Sale

1/12/2017

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Xtera Communications, which specializes in Raman amplification-enabled optical transport systems for terrestrial and submarine networks, has filed for Chapter 11 protection with an eye toward selling the company. A stalking horse bidder for the company has been found.

The company, including seven of its affiliates, asserted in a November 15 filing with the US Bankruptcy Court for the District of Delaware it has assets of approximately $50.47 million but debts of approximately $66.46 million owed to between 1,000 and 5,000 creditors. According to the filings that included a declaration in support of the Chapter 11 petition from Xtera's CFO, Joseph R. Chinnici, the company has been struggling with liquidity problems for the last nine months, caused by, among other things, the expiration of certain key contracts. After exploring various alternatives, the company decided to pursue Chapter 11 and a post-petition marketing and sale process.

"The Debtors do not have sufficient liquidity to continue operating outside of bankruptcy, and the pursuit of a sale transaction during these chapter 11 cases presents the best available option to maximize value for the Debtors' estates," Chinnici writes in his filing.

The company has reached agreement with Neptune Bidco, a unit of H.I.G. European Capital Partners, to provide a stalking horse bid for the company of $10 million, a figure that includes $7.4 million in senior debtor in possession financing. The Debtors seek joint administration of these cases. Epiq Systems, Inc. is the proposed claims agent. The cases have been assigned to the Honorable Kevin J. Carey. If all motions are approved, the Court will accept additional bids for the company. A similar procedure was in place when Ciena purchased the optical networking assets of bankrupt Nortel.

Xtera was founded in 1998. It launched an IPO in November 2015 and its shares traded on NASDAQ under the symbol XCOM. However, the company received a notice of delisting from NASDAQ on October 6, 2016, because Xtera had failed to regain compliance with NASDAQ Marketplace Listing Rule 5550(b), which is the continued listing requirement to maintain a total stockholders' equity of $2.5 million. The company's board decided not to fight the delisting notice, and its stock is now traded over the counter.

Adapted from:
Lightwave Magazine & http://www.jdsupra.com

ANALYSIS: JRC has been noting signs of distress from Xtera since its disappointing IPO highlighted in Issue #33. In August this year, FoxConn terminated its Master Services Agreement with Xtera for contract manufacture of much of Xtera's equipment. In September, there were industry rumours of deep cuts in Xtera staff and SEC filings indicating frantic efforts by existing shareholders to add liquidity to the company.

While not strong, Xtera's pipeline in September consisted of signed contracts with the SRG-1 and G2A consortia and Cinia worth around US$100M but this potential revenue could only be realized over the course of the next two years through meeting project delivery milestones. Moreover, these contracts were also subject to the risk that the purchasers would not be able to garner funding for the project. As such, Xtera's submarine business was a house of cards.

In the past, Xtera also had terrestrial demand for its technology but this evaporated over the last few years in the face of stiff competition from Ciena, Infinera, and others. Xtera instead made the strategic decision to focus on submarine and enter the repeatered systems supply market, having previously only served the unrepeatered market.

This entailed some significant investment in repeater and branching unit technology but resulted in some unremarkable "me-too" products, positioned as "minimizing complexity" but actually adding nothing to the market. The only bright spot was Xtera's continued progress in using Raman technology to extend the distance of repeaterless systems although other system suppliers, such as Nokia ASN and Huawei Marine, have achieved similar lab test results recently.

In addition to problems with the product portfolio, Xtera also suffered from a lack of experience in implementing repeatered submarine fiber optic systems and their pricing was hamstrung by their core contract-manufacturing business model.

Xtera is the first of the "new generation" of submarine fibre optic system suppliers to fail. Huawei Marine manufactures in-house and has done better than Xtera in terms of winning projects. HMN also probably has access to funding if liquidity were to become an issue. Brazilian firm Padtech has not yet made a sale outside of Brazil. It is difficult to imagine what value there is in Xtera, other than the IP associated with the company's Raman technology and the technical human resource, much of which may already have been let go.

It is also interesting to speculate on whether Xtera's going under will trigger further consolidation in the submarine fiber optic systems supply market. 
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    Thought leadership articles and commentary on developments related to the subsea fibre optic cable industry can be found here.

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    Julian Rawle participated in the Submarine Networks World Conference 8-10 September 2015 in Singapore

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