Nortel takes stake in Tejas Networks

Nortel Networks is picking a minority stake in Bangalore-based optical network firm Tejas Networks. The deal is part of a product sourcing arrangement wherein the $11.4-billion Canadian telecom equipment company was to get the equity stake after certain purchase milestones with Tejas as the original equipment manufacturer (OEM) supplier.

According to sources close to the deal, Tejas would issue warrants to Nortel to acquire 12,954 equity shares of Rs 10 each at a premium of Rs 9,046 per share. This would translate into an investment of about Rs 12 crore.

Significantly, the price at which the warrants would be issued has been modified recently. As per the original terms of the agreement between Nortel and Tejas struck three years back, the exercise price of each share was fixed at Rs 13,115. However, last month the two parties decided to change the exercise price to Rs 9,056 per share. In this transaction, Nortel is not being inducted as a promoter and would not have a lock-in period for its shares.

Incidentally, Tejas is expected to go public next year. Though it is not clear if the public offering would be launched in India or in the US.

As per the deal between the two parties, a certain number of warrants was to vest with Nortel after each $5 million worth of OEM purchase from Tejas. In total 12,954 warrants was to vest with Nortel after its cumulative OEM purchase from Tejas hit the $50 million mark.

Tejas is a privately-owned company co-founded by Sanjay Nayak (CEO), Kumar Sivarajan (CTO) and Arnob Roy (VP Engineering). It is backed by investors, including serial entrepreneur and ace venture capitalist Gururaj Deshpande, and VC firms Battery Ventures and Mayfield. The other investors include US-headquartered Sycamore Networks, investment funds Sandstone Capital, Intel Capital and the Khemkas-owned Sun Group.

The company, which has a strong presence in the next generation optical networking space with about 25% market share, is targeting a topline of Rs 400 crore in the current year. In FY07, it reported revenues of around Rs 234 crore which was five times its revenues in FY05.

For Nortel, this would be second such equity deal in India after it picked a minority stake in long-term supplier Sasken Communications Technologies in 2005 by investing $10 million.