Buyer Boosts Stake in Rising Sonus

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THE STOCK IS NEAR MULTIYEAR HIGHS and the company is facing delisting, but one value investor sees potential in Sonus Networks, a maker of equipment for Internet phone networks.

This week Legatum Capital bought 1.14 million shares for $9.7 million, or an average of $8.49 per share, according to Securities and Exchange Commission filings. Legatum's holdings were disclosed by its parent company, Senate Limited -- a Cayman Islands trust.

Since first disclosing a 6.6% stock position in March, Legatum, which calls itself a "long-term value-oriented portfolio investor," has bought 19.7 million additional shares for a 14.6% stake in Sonus. The Dubai-based investor is now Sonus' largest shareholder, according to data from StreetSight.net. Fidelity Research & Management is second with a 13.9% position.

Neither Sonus nor Legatum responded to requests for comment.

Since Legatum's initial disclosure in Sonus -- a provider of infrastructure for wireless and wireline voice over Internet protocol (VoIP) networks -- the shares have gained more than 17%. And, over the past 12 months, the company's stock is up 89% versus a 24% gain for the Dow Jones U.S. Telecommunications Equipment Index.

Yet, Sonus is surrounded by some uncertainty, as the company continues an options-grant review that has delayed the filing of its last four quarterly reports. On Tuesday, Sonus said its shares would continue to trade on the Nasdaq Global Select Market after the Nasdaq Board of Directors "granted a stay of the delisting of the company's securities pending further review by the Board in July."

Sonus said the filings would take place "as soon as possible" and expects to regain compliance for continued listing.

In addition to Legatum, the overall institutional ownership in Sonus has steadily risen since 2005, according to Joshua Hong, director of research at OwnershipAnalyzer.com. As of this year's first quarter, 161 institutions held 167.4 million shares, up from 126 institutions with 118.6 million shares in the third quarter of 2005.

Short interest, though, has also increased of late, Hong said in an e-mail, from 19.8 million shares on Feb. 15 to 28.2 million as of June 15.

While Legatum and other institutions have been active buyers, company officers and directors have been quiet on the investment front, with the last insider transaction taking place in October 2003, according to InsiderScore.com data. As such, Sonus gets a relatively neutral score of four on Thomson Financial's 10-point insider rating scale (with 10 being the most bullish).

Wall Street is also neutral on the company's shares, with 13 firms averaging a Hold rating (or its equivalent), according to Thomson Financial's First Call Mean.

After the company's abbreviated fiscal first-quarter report in May came in below expectations, Cantor Fitzgerald analyst Edward Jackson maintained a Hold rating and $7 price target. "We continue to feel Sonus is well positioned to capitalize on the growth of VoIP services, but remain limited in our enthusiasm for the shares because of valuation," he wrote in a research report. "Hence, we suggest that new investors sit on the sidelines at this time."

With shares up 17% since the May earnings report, however, the market seems more persuaded by the bullish argument of SMH Capital's Natarajan Subrahmanyan. In his postearnings research report, Subrahmanyan maintained a Buy rating and $9 price target.

He wrote that Sonus shares were "reasonably valued" and said the company "remains one of the best growth stories in our coverage space."

"Given the company's leadership in an important segment of communications equipment that is benefiting from reallocation of spending, strong near-term momentum and a potential inflection point in the VoIP market," Subrahmanyan added, "we think Sonus deserves a premium multiple to the communications-equipment group."