Optimism Rises for Nortel Unit Sell-offs

Financial results released Aug. 10 by Nortel suggest that the outlook for the company's on-the-block businesses may not be as bleak as previously thought.

Nortel, which is selling off its various divisions after slumping into bankruptcy, released second-quarter results that beat expectations. Sales fell 25% from a year earlier, but jumped 14% from the first quarter, when the debt-burdened maker of telecom equipment said it was seeking protection from creditors. The company's losses widened to $274 million, from $113 million a year earlier, in part due to the costs of reorganization. But the company's cash rose slightly.

Taken together, the numbers suggest Nortel may have an easier time finding buyers for some divisions that remain up for sale. "It's not like they are in free fall," says Akshay Sharma, a research director at consulting firm Gartner (IT). Nortel's other businesses "should be more attractive now." Would-be customers, in turn, are likely to be more comfortable about doing business with Nortel as confidence rises that its operations will be in the hands of stable parent companies. "People are now understanding [that Nortel] is not going to disappear," says Ronald Gruia, principal analyst at Frost & Sullivan.

The selling of Nortel's divisions is well under way. In an auction that wrapped up in July, Nortel sold much of its wireless equipment business to rival vendor Ericsson for $1.13 billion. On July 20, Nortel also said it had lined up Avaya as a tentative buyer—a so-called "stalking horse" bidder—for the unit that sells telecommunications equipment to corporations; it is expected to be auctioned off in September.

"A Labor of Love," Says Departing CEO The remaining Nortel businesses are likely to attract stalking-horse bidders and subsequent auctions, says CEO Mike Zafirovski, whose immediate departure was also announced on Aug. 10. "I am pretty confident that [remaining management] would be able to bring stalking horses before the quarter is over," Zafirovski tells BusinessWeek.com. The company also shrunk its board to three members, from nine.

"It was a labor of love," Zafirovski says of his time at Nortel. "I feel good about where the company is at right now. This Chapter 11 process has really allowed us to stabilize the business." He says he plans to take time off and maybe travel, and then return to work. "I won't be retiring at the age of 55."

Potential acquirers of Nortel's metro Ethernet business, which makes gear for broadband networks, could include Juniper Networks (JNPR), Sharma says. The two companies have close ties. Nortel Chief Strategy Officer George Riedel, who will take over sales discussions from Zafirovski, was in charge of strategy and corporate development at Juniper until moving to Nortel in 2006. Juniper's chief marketing officer, Lauren Flaherty, held that post at Nortel until last year.

Rival gearmakers Tellabs (TLAB), Cisco Systems (CSCO), and Ciena (CIEN) could be in the running as well, analysts speculate. And Nokia Siemens Networks, which submitted an unsuccessful bid for the operations that were sold to Ericsson, could still bid for other Nortel units. Gearmaker Sonus (SONS) could seek to acquire Nortel's remaining business—providing equipment to carriers.

Parliament Probes RIM Complaint Meanwhile, some of Nortel's patents might lure buyers. BlackBerry maker Research In Motion (RIMM) may be seeking to acquire about 3,000 patents, many related to wireless network technology. In June, Ehud Gelblum, an analyst at JPMorgan Chase (JPM), estimated that one portfolio of patents may be worth as much as $2.9 billion. In the past, Zafirovsky expressed hopes that Nortel could keep the patents and simply license them to companies like RIM. Now a sale of the patents is a real possibility. "We look forward to having very comprehensive discussions with RIM and other interested buyers," Zafirovski says. He says carriers and other high-tech companies have expressed interest in the patent portfolio.

On July 20, RIM said it "has effectively been prevented" by Nortel in bidding for the company's wireless businesses. On Aug. 7, the Industry Committee of the Canadian House of Commons held a hearing to review the allegations and it expects to investigate the matter further this week. Zafirovski says his departure is "absolutely not" related to the RIM scuffle.

After Zafirovski makes his exit, Nortel's business units will report to Chief Restructuring Officer Pavi Binning. The company's mergers-and-acquisitions teams will continue their work under Riedel. The company will seek court approval for bankruptcy monitor Ernst & Young to take on a greater role in overseeing the business and forthcoming sales. The company's board will now be headed by David Richardson, a former chairman of Ernst & Young (Canada), where he specialized in corporate restructurings.

Known as a turnaround guru, Zafirovski arrived at Nortel in late 2005 after helping Motorola (MOT) gain renown and market share with the popular Razr phone. By the end of 2005, Nortel was already burdened with $3.9 billion in long-term debt and was fighting with more powerful rivals for market share. The recession hit sales and threw a wrench into Zafirovski's turnaround plans. "In his defense, he inherited a company with a tremendous debt load," says Abner Germanow, a director at consultant IDC. "It's difficult to say," he continued, how much of Nortel's problems stemmed from business decisions vs. "bad market conditions and tough debt markets."

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