Nortel Networks, the troubled Canadian telecoms equipment supplier, is more likely to be broken up than to emerge intact from bankruptcy protection, according to analysts.
“I am not expecting Nortel to emerge from bankruptcy, I think there will be a full break-up,” says Ping Zhao, a credit analyst with New York-based CreditSights, who tracks Nortel. “From the minute that Nortel filed for bankruptcy protection, revenue probably started to decline dramatically.”
Nortel, once Canada’s technology flag carrier, filed for protection from its creditors in January as the global recession led many of its largest customers to cut back spending and pushed the company to the brink of collapse.
Before the recession, Nortel was already looking subscale compared with rivals, partly because of a wave of industry consolidation.
The company lacks the economies of scale of larger competitors, led by Sweden’s Ericsson.
In 2008, Nortel reported a net loss of $5.8bn, when revenue fell 5 per cent to $10.4bn. Its gross cash position deteriorated from $3.5bn at the end of 2007 to $2.4bn at December 31.
Since the bankruptcy protection move, Mike Zafirovski, Nortel’s chief executive, and Pavi Binning, chief financial officer, have been evaluating the company’s options, including the possible sale of some or all of its four main business units. Industry and financial analysts are convinced that the most likely scenario is that the company will be sold off piecemeal, probably at knock-down prices.
“It is becoming increasingly likely that Nortel will be broken up,” says Ronald Gruia, analyst at Frost & Sullivan. The only question, he and some other analysts suggest, is whether Mr Zafirovski will seek to salvage the Nortel name by hanging on to a small part of the business.
Most analysts say Nortel’s core carrier unit, which supplies wireless network equipment to mobile phone operators and generated about 42 per cent of the company’s revenue in 2008, will be sold off.
Nokia Siemens Networks, the telecoms equipment maker controlled by Nokia, the Finnish mobile phone manufacturer, has made an informal offer for Nortel’s carrier unit, say people familiar with the situation.
Nokia declined to comment. However, people close to the company say that Nokia Siemens Networks is interested in the unit because it would strengthen its position in the lucrative US market.
Nokia Siemens Networks trails Alcatel-Lucent, Nortel and Ericsson in the North American market.
However, analysts caution that the Nortel unit’s value might have been eroded by client losses since Nortel filed for bankruptcy protection. The company was dealt a significant blow in February when Verizon Wireless, the leading US mobile operator and one of Nortel’s biggest customers, decided not to award it part of a multibillion dollar contract for fourth-generation wireless network equipment.
Nortel’s carrier unit may be sold for as little as $500m, says Pierre Ferragu, analyst at Bernstein. He adds the maximum likely price is $1bn.
Ericsson is also looking at Nortel’s assets, although people close to the Swedish company play down the prospect of any deals. Huawei Technologies, the Chinese telecoms equipment maker, has also held discussions with Nortel about its assets, but the talks have not advanced.
Alcatel-Lucent, which has yet to make a success of the 2006 merger between its French and US predecessor companies, is not interested in Nortel’s assets.
Nortel has refused to comment on whether it has sought or received offers for some of its business units.
It says: “We are pursuing opportunities that we believe will provide maximum benefit to our key stakeholders, including our creditors, customers and employees.”