Nortel creditors could be excused for cringing when they learned in June that the bankrupt telecom equipment maker agreed to sell some of its businesses to Nokia Siemens Networks for $650 million.
Nokia Siemens was getting several Nortel wireless equipment businesses on the cheap, some analysts reasoned. And that might presage other fire-sale agreements, giving Nortel debt holders an even smaller return than they had hoped for.
Creditor MatlinPatterson Global Advisors is weighing a plan that might end the cringing. The investor has held talks with Nortel aimed at purchasing the entire company, BusinessWeek.com has learned. MatlinPatterson's interest in Nortel, reported earlier by the Financial Times, could result in a welcome alternative to selling the company in pieces. Concern that Nortel's businesses would be sold for too little gathered steam on June 19 with the announcement of the Nokia Siemens deal, which valued the wireless businesses at about one-third of their annual sales.
Should other units fetch comparable prices, the entire company, which once boasted a market value north of $300 billion, would go for as little as $2 billion. Analysts say that's too little, in spite of the financial straits that forced Nortel to seek bankruptcy protection from creditors in January.
Chinese Among Potential Buyers?
MatlinPatterson Global Advisors didn't respond to a request for comment. Nortel spokesman Mohammed Nakhooda declined to comment.
MatlinPatterson or any other suitors for the wireless units have until July 21 to submit a bid. If rival bids emerge, the businesses would be auctioned on July 24. Other potential buyers for those businesses include Chinese gearmakers Huawei Technologies and ZTE, which are trying to expand in North America. Neither company responded to a request for comment.
In case of a rival bid, Nokia Siemens will have to offer at least $5 million over the amount of the counterbid to compete for the assets. Nortel is getting legal advice from law firms including Cleary, Gottlieb, Steen & Hamilton; Lazard (LAZ) is its financial adviser. .
Nortel's other divisions may also fetch a higher price compared with sales, analysts say. "There's probably more value than creditors think," says Ehud Gelblum, managing director at JPMorgan Chase (JPM). For starters, there's a portfolio that includes patents on a wireless technology called Long-Term Evolution (LTE). It alone could be worth up to $2.9 billion, Gelblum wrote in a June 29 report. AT&T (T) and Verizon Wireless, the largest U.S. mobile-phone operators, as well as other carriers are all upgrading their networks to the LTE standard. Nortel expects to collect a 1% royalty from the sale of each device using its LTE patents. Potential acquirers of the patent portfolio include Qualcomm (QCOM) and Research In Motion (RIMM), Gelblum says. Qualcomm and RIM declined to comment on the speculation.
Metro Ethernet Unit May Be Attractive
Another alluring Nortel asset is its enterprise division, which sells networking gear for large companies. It, too, is likely to sell for "a higher multiple" than the wireless division, says James Kelleher, an analyst at Argus Research. The division could garner half of its annual sales, he figures. In 2008 the unit booked $2.4 billion in revenue.
Potential acquirers include Avaya, which enjoys the backing of affiliates of private equity firms Silver Lake and TPG Partners, and GenBand, whose investors include Alcatel-Lucent (ALU), says Akshay Sharma, a research director at consultant Gartner (IT). Siemens Enterprise Communications, backed by private equity firm Gores Group, may also be interested, says Ronald Gruia, principal analyst at consultant Frost & Sullivan. None of these potential acquirers would comment on the speculation.
Nortel also owns a business, referred to as Metro Ethernet, that supplies equipment for broadband networks. Despite Nortel's travails of late, the division has held tight to market share. "If you put [Nortel] in the context of the market, [where all vendors have seen a drop-off in orders], it's not doing so badly," says Dana Cooperson, a vice-president at researcher Ovum. The division also "is clearly in the lead" in commercializing some of the next-generation, high-bandwidth technologies, she says. "That's a very valuable asset."
Gartner's Sharma says the Metro Ethernet business has a market value comparable to that of Ciena (CIEN), which has a capitalization of $902.4 million and whose 2008 sales totaled $780 million. Nortel's Metro Ethernet division had sales of $1.4 billion last year. Potential acquirers include Tellabs (TLAB) or Sycamore Networks (SCMR), Sharma says. Juniper Networks (JNPR) could be in the running as well, Cooperson says. The companies wouldn't comment.
Analysts expect the telecom equipment market to begin recovering in 2010. Carriers' wireless capital expenditures stagnated in 2009, but they're expected to rise 7% next year as governments pour stimulus money into telecom infrastructure projects and carriers build next-generation wireless networks, according to Ovum. Spending on fixed telecom projects will start rallying in 2011. Already, "there are a lot of very positive market indicators," Cooperson says.
For now, Nortel will no doubt continue to be plagued by a sales slump and concerns about whether it will be around for the long haul. The company recently lost out on a big contract. Longtime customer Verizon Wireless awarded orders for next-generation equipment to Alcatel-Lucent and Ericsson (ERIC). "We think their new solution is very, very good," Cooperson says. "But they've been hit with concerns about their viability."