Zhone Technologies will acquire Sorrento Networks in an all-stock transaction, the two companies announced after the close of business Thursday.

Under the agreement, Zhone will give 0.9 shares for each of Sorrento’s 17.5 million outstanding shares (fully diluted) and assume all Sorrento’s options, warrants and securities for exercise or conversion into Zhone stock. At Thursday’s close, Sorrento’s stock was $2.67 a share, nearly 70% the price of Zhone’s stock.

Zhone hopes Sorrento’s optical transport products will compliment its own access products and that Sorrento’s established base of cable multiple system operators (MSOs) will give Zhone greater inroads into that market. Zhone, whose customers include about 200 independent rural telcos, has had more traction with telecom carriers, while some of Sorrento’s biggest customers include Time Warner Telecom and Comcast Commercial Services, a business-focused unit of Comcast.

“We were, or are, selling equipment to cable operators, mainly backhauling voice on TDM networks, but we’re not in front of those guys when it comes to transport products or Ethernet services,” said Zhone CEO Mory Ejabat. “That area is very interesting to us.”

But Zhone also expects Sorrento to help it break even financially. Zhone reported a net loss in excess of $17 million in 2003 on revenue of more than $83 million, claiming that it would break even at about $125 million. Sorrento booked about $25.5 million in revenue for its fiscal 2004, which ended January 31—flat from the previous year.

“I’d say this would get us to profitability,” Ejabat said, adding that he did not know the amount of synergies attainable through combining the companies nor how much the combined company might benefit from cross-selling of products. “We have to work through cost reductions and maintain our customers.”

Ejabat would not go into detail on product line integration, but said that one of the merged entity’s first tasks along those lines might be to integrate all products under a common management platform.

When asked about Sorrento’s motivation to merge, Sorrento’s CEO Phillip Arneson pointed to the increased credibility that Sorrento would achieve with more financial muscle. “The real business out there is done with large, large carriers,” he said. “And the strength of the company has a lot to do with their [vendor] selection process. At the end of the quarter, we had $18 million in cash.”

The deal represents Zhone’s tenth acquisition (not including its purchase of a Nortel Networks access product line) and its second so far this year. Zhone acquired switch vendors Gluon Networks in February and Tellium in July 2003. Sorrento acquired its competitor, LuxN, in June 2003.