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Nortel's Remnants: Up for Grabs

On the morning of July 24, bidders will assemble at the offices of a New York law firm to compete for parts of bankrupt Nortel Networks' wireless telephone equipment business.

It's the first of several upcoming auctions of Nortel's (NRTL.Q) businesses, and the winner, likely determined by the end of July, will snare several networking technologies carriers use to transport data and phone calls. Depending on who wins, some buyers may stick around to compete for four other Nortel units up for sale.

One bidder, private equity firm MatlinPatterson Global Advisers, has bid $725 million for the wireless assets and says it will participate in future auctions if it wins this one. Another, Nokia Siemens Networks, has bid $650 million, and may be willing to pay up to $800 million, according to Richard Windsor, an analyst with Nomura Securities. Nokia Siemens spokesman Ben Hunt says the company's bid "represents the best long-term value for Nortel customers, employees, and other stakeholders."

Saving Jobs a Factor If the bidding for Nortel's wireless business reaches $800 million, it would indicate other units may fetch 40% of their annual sales as well—a richer proposition for Nortel's creditors than the 30% Wall Street originally figured on. Some divisions could be worth even more. An $800 million wireless sale could also value all Nortel's assets at $2.6 billion, vs. analysts' initial estimates of $2 billion.

For sale this month are Nortel businesses that produce equipment for wireless networks based on so-called Long-Term Evolution and Code Division Multiple Access technologies, used by carriers including Verizon Wireless to carry voice and data signals. Sales of CDMA gear are declining as carriers migrate to faster LTE and other next-generation infrastructure. But CDMA can be a cash cow, yielding profit margins as high as 20%, as it requires little research and development investment to maintain, says analyst Windsor.

The final determination about who gets Nortel's wireless businesses won't be based solely on the highest bid. Nortel will make a recommendation after the auction closes, likely on July 24, based on criteria including saving its workers' jobs. On July 28, a judge at the U.S. Bankruptcy Court for the District of Delaware will decide on which bidder should get the assets. A similar hearing in Canada is scheduled for July 30.

Revving Up in North America For Nokia Siemens, winning the wireless assets could help rev up its North American business, where it's secured just a few contracts. On July 20, the joint venture said it had won a deal to build a wireless network in Canada for phone company Globalive Wireless. Nortel's longstanding relationships with wireless carriers could help Nokia Siemens win larger deals for next-generation wireless networks, including those based on LTE. "They are interested in getting an installed base and relationships with carriers," says Ronald Gruia, a principal analyst at consultant Frost & Sullivan.

MatlinPatterson may have other goals in mind. Nokia Siemens has to bid at least $761 million to grab the Nortel assets from the private equity firm, and many analysts say Matlin may not be willing to up the ante further. "It may be in their interest that the price goes higher," says Akshay Sharma, a research director at consultant Gartner (IT), since the private equity firm is also a Nortel creditor, holding 10% of the equipment maker's debt.

MatlinPatterson, which helped restructure WorldCom, has hired a group of auction advisers headed by Nortel's former North American president, Dion Joannou. If it acquires the wireless assets, the firm may also bid for other Nortel units, such as its division that makes telecom equipment for corporate clients, analysts speculate.

"A Good Starting Point" The amount of the winning wireless bid will serve as a signpost for the relative value of Nortel's other divisions. Also on the block are Nortel's "enterprise" corporate telecom equipment business, which Avaya Communications has bid on, and a unit that makes Metro Ethernet equipment used in broadband networks. Nokia Siemens could be a bidder for the broadband business. "We'd not be surprised if the same company bids for multiple businesses," Nortel CEO Mike Zafirovski told

Avaya has offered $475 million for the enterprise business. Avaya's bid is just "a good starting point," Zafirovski says. The equipment maker could see competition from Siemens Enterprise Communications, says Frost & Sullivan's Gruia. Whoever wins will likely get "a revenue stream that's going to be as steady as it can get in telecom," since corporations tend to stick with phone vendors for long periods of time, he says.

A couple of wild cards remain. Other bidders, including Alcatel-Lucent (ALU) and Ericsson (ERIC) may participate in the July 24 wireless auction, says Gartner's Sharma. Alcatel-Lucent wouldn't comment. Ericsson didn't return a request for comment.

RIM Not Out of the Running BlackBerry maker Research In Motion (RIMM) could seek to delay the auction or legally challenge its results. On July 20, RIM announced that it wanted to participate in the wireless auction, but "has effectively been prevented from submitting an offer." That's because RIM wouldn't sign a nondisclosure agreement that other bidders agreed to, says one source familiar with the matter.

Research In Motion says the agreement contained "onerous restrictions," and a company spokeswoman said in an e-mailed statement that "RIM does not consider the process closed."

RIM may join with either MatlinPatterson or Nokia Siemens to help outbid the other party, analysts say. Nortel holds patents that could help BlackBerrys work better over wireless networks, and they could be worth up to $2.9 billion, according to Ehud Gelblum, a managing director at JPMorgan Chase (JPM).

The fight for Nortel's most attractive pieces is about to commence.
Kharif is a reporter for Bloomberg News and Bloomberg Businessweek in Portland, Ore.

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