Alcatel-Lucent (NYSE: ALU) has struck a deal to sell LGS Innovations, its public sector subsidiary, to Madison Dearborn Partners and CoVant for $200 million as part of its ongoing shift to become a specialist in IP networking and broadband access.
Under the terms of the agreement, the Madison Dearborn/CoVant group will pay 50 percent of the total amount of the acquisition at closing and up to 50 percent depending on the divested company's results in the fiscal 2014 year.
This deal affords a number of benefits to LGS.
Kevin Kelly, CEO for LGS Innovations, said that because they will become a U.S.-based company, they will be able to pursue various opportunities outside of the federal government sector.
"Madison Dearborn/CoVant will unshackle the company and take us out of focusing on just the federal government and allow us to expand into state and local business, large enterprise business, utility industries, and telecommunications broadly across the world," he said.
Madison Dearborn/CoVant will also give LGS access to capital to potentially conduct other acquisitions and investments to enhance the business.
In the state and local government market, it could provide standard wireless equipment, including CDMA and LTE technology, which it used to build solutions for the defense and national security agencies.
"When you look at the state and local business, utility pipeline, border patrol, and port authorities, a lot of those same challenges now exist," Kelly said. "They are looking for a lot of the same solutions so it's a natural extension of our federal government business to get into the state and local and into first responder communities just in one of our businesses, which is secure mobile technology."
LGS sees similar opportunities in the environmental, business, and telecom sectors.
Kelly said that they can extend the same spectroscopy technology they have provided to the military to the utility industry.
"Some of the technologies we have in our research labs for analyzing gaseous emissions for environmental purposes or being able to do spectroscopy to sense, detect and identify chemicals at a great distance is germane in the battleship environment, but as you look at environmental missions and gas exploration these same technologies have very definite applicability," he said.
The new company will also be able to pursue a wider range of more traditional service provider opportunities by providing network construction and integration services. While LGS will continue to serve as a reseller of Alcatel-Lucent equipment, it will be able provide other vendors' gear.
In the telecom sector, LGS could extend Free Space Optics (FSO) technology from Alcatel-Lucent or another vendor to wireless operators that need an alternative backhaul solution.
"With Free Space Optics, a small wireless operator could go rooftop to rooftop without FCC licensing, without spectrum leasing, or trenching fiber at a million dollars a mile underneath some urban environments," Kelly said. "Some of the technologies we have could present a small carrier with a very distinct economic advantage and utilize some of the dual use technologies that grew up in the military space."
Selling LGS is also important to Alcatel-Lucent, which has been trying to sell off various assets as part of a broader goal to reduce $1.34 billion in assets.
Besides LGS, the vendor has made several attempts to divest its enterprise division, but has not been able to strike a formal deal yet.
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