Ciena Corp. has offered $390 million US and 10 million shares to Nortel Networks Corp. for its optical networking and carrier ethernet business.

Ciena Corp. has offered a $521 million stalking horse bid for one of Nortel's most prized remaining assets. (Nathan Denette/Canadian Press)

Based on the closing price of Ciena's shares on Tuesday, the total bid is valued at $521 million.

The agreement, rumoured to be in the works when the two firms confirmed they were in advanced discussions earlier this week, includes all patents and intellectual properties of the unit, Nortel said in a release.

Considered a stalking horse bid, the deal would require Ciena to offer employment to at least 2,000 current Nortel employees or 85 per cent of the unit's current workforce.

A stalking horse bids is the term for when financially distressed companies select a preferred buyer for their assets, and get them to submit a bid.

The purpose is to set a benchmark price, discourage other lowball offers and kick off a competitive bidding process. The stalking horse bidder often gets some sort of break fee if the transaction eventually falls through.

The stalking horse bid is quite often well below the eventual purchase price. Avaya Inc. submitted a stalking horse bid of $475 million US for Nortel's enterprise business in July. It ended up buying the unit for closer to $900 million.

Committed to Canada, Ciena vows

Nortel would be subject to certain restrictions on reselling the Ciena shares. The deal would still require the approval of courts in Canada and the U.S.

Ciena, which had been one of Nortel's smaller rivals in an important market niche, said Ottawa would become home to Ciena's biggest research and development centre if the purchase is completed.

"We see this as a unique opportunity to bring together two companies that have a highly complementary set of product capabilities," Ciena vice-president James Frodsham said.

Ciena has about 2,100 employees, including development facilities in Ottawa — where Nortel has long had its main research and development centre — as well as in Georgia, Maryland, California, Washington State and India.

Nortel has been in the process of selling off its assets since seeking protection from its creditors in January. Earlier this year, Nortel sold its coveted wireless assets to Sweden's Ericsson for $1.1 billion.

With files from The Canadian Press