Celestica Inc. has agreed to buy smaller rival Primetech Electronics Inc. for about $270-million in stock, a decision analysts say is mainly motivated by its desire to get additional business from Alcatel SA, Primetech's No. 1 customer.
"They're extremely well positioned to be able to win the outsourcing from Alcatel in Europe and there's about $6-billion (U.S.) worth of manufacturing assets to be sold," said Pierre-Yves Terrisse, a financial analyst at Yorkton Securities Inc. in Montreal.
Now that telecommunications giant Alcatel has suspended merger talks with Lucent Technologies Inc., Alcatel, which has not so far outsourced manufacturing on a large scale, is expected to quickly do so, Mr. Terrisse said.
John McAllister, Primetech's president and chief executive officer, who co-founded the company in 1976, said the Alcatel assessment by analysts "is very accurate."
Celestica has some Alcatel business already, but not to the extent that Primetech will give the world's third-biggest maker of components for PC manufacturers and telecommunications networking suppliers, says Andreas Hoppe, technology analyst at BMO Nesbitt Burns Inc. in Montreal.
Last year, supply agreements from Alcatel and Sun Microsystems Inc. accounted for about 90 per cent of Primetech's overall revenue of $205-million (Canadian), Mr. Hoppe said. Kirkland, Que.-based Primetech is expected to reach sales of $300-million this year, Mr. Hoppe forecast.
Toronto-based Celestica announced the agreement with Primetech after markets closed on Thursday, the same day Celestica agreed to make and repair cellphones for Paris-based Sagem AG in a three-year deal worth about $500-million (U.S.).
The stock of Celestica rose $2.55 (Canadian) to $79.10 on the Toronto Stock Exchange yesterday. Primetech stock rose $1 to $17 on the TSE.
The Primetech deal "provides Celestica with additional high-complexity manufacturing capability and also expands its global customer base," Eugene Polistuk, Celestica's chairman and chief executive officer said in a statement.
Primetech's forte has been assembling printed circuit boards for emerging telecommunications suppliers, such as closely held Hyperchip Inc. of Montreal, that require complex components in smaller batches, Mr. Terrisse said.
"As they grow and mature, [Celestica's]going to be able to support them all the way through their life," Mr. Terrisse said.
Mr. Polistuk told an audience at an Onex Corp. shareholder presentation yesterday that "there are a lot of other discussions going on." He was explaining how Celestica would achieve its goal of reaching $20-billion (U.S.) in annual revenues in 2003. Onex is a major Celestica stakeholder.
Under the terms of Thursday's agreement, Celestica will exchange .22 of its subordinate voting shares for each Primetech share. There are 15.5-million outstanding Primetech shares. Based on yesterday's closing prices, Celestica valued the deal at about $270-million (Canadian). As part of the deal, Celestica said it will assume about $4-million in Primetech debt and stock options.