Upon its filing for bankruptcy, the future for Nortel Networks Corp. looks cloudy, as analysts now speculate whether the company can stay in business, sell assets or even be bought out by a competitor.
The Canadian telecommunications giant filed for bankruptcy today for protection from creditors in Canada, United States and Europe.
Mike Zafirovski, Nortel CEO and president, said in a video message on the company’s Web site that the current economic climate, high debt and an expensive cost structure pushed the company into seeking legal protection as it restructures its operations.
The company’s stock has also been trading for less than a $1 for numerous weeks and today was trading at about 30 cents.
Zafirovski said the filing marks the start of a comprehensive business and financial restructuring that is aimed at providing “financial footing” for the company.
“Ultimately, I believe that this process will enable Nortel to become a more financially sound and competitive company,” Zafirovski said in his video message. “A company that will continue to deliver winning technology and solutions to a global marketplace that is hungry for innovation and communications.”
The Canadian government said it will support Nortel’s efforts to restructure. Tony Clement, minister of industry, said in a statement that Export Development Canada has agreed to provide up to $30 million in short-term financing through its existing bonding facility.
“The government in Canada appreciates the importance of the telecommunications industry to our economy and will continue to work with Nortel,” Clement said.
Potential purchasers
Analysts were not surprised by Nortel’s decision to seek bankruptcy and offered opinions on how the company can move forward.
“Nortel has lost confidence in the service provider community,” said Nadine Manjaro, an ABI Research analyst. “It is sad because Nortel has been a great company for many years.”
Manjaro said Nortel remains strong when it comes to the enterprise, but has suffered because the company attempted to win business from service providers. This has area has not taken off as the company has lacked a clear strategy and operators have changed choices in technology.
Manjaro said the company can return to the marketplace if it focuses on its enterprise offerings and continues to develop its unified communications unit.
“Hopefully, they will put a strategy around those areas and build back the company,” she said.
Maynard Um, UBS analyst, wrote in a note following the announcement that a potential sale of Nortel to Hauwei Technologies Co. Ltd. would pose a threat to European vendors, who now dominate the global market. L.M. Ericsson is positioned at the top followed by Nokia Siemens Network, Alcatel-Lucent and Hauwei, according to ABI Research.
Hauwei “would gain significant market access in North America and might also open the door for Verizon Wireless’ LTE vendor selection” if it purchased Nortel, according to Um.
Um also wrote that large mergers and acquisitions in the equipment industry have rarely led to margin improvements in the past, but such a move by Ericsson is a “distinct possibility.”
However, Um wrote that Nortel is not a strategic fit for Ericsson because Ericsson has a good chance of being tapped by Verizon Wireless for its LTE rollout without assistance from Nortel.
Um said that while that it is too early to tell how Nortel will emerge from bankruptcy, it may well remain independent and continue operating.
Crushing debt
Ronald Gruia, a Frost & Sullivan principal analyst, said Nortel was forced to enter into bankruptcy because of its debt and cash flow. He said the company’s board of directors met Tuesday to discuss a pending $107 million interest payment. The payment is part of a $1 billion bond the company is due to pay in 2011. The company also has a pension deficit that has been reported to be between $2.3 billion and $2.8 billion.
Gruia said the board decided to act now. The company ended 2008 with $2.4 billion, which could decline to $1.6 billion by the middle of this year. The company needs $1 billion to operate.
By seeking bankruptcy protection, Nortel “now has the opportunity to restructure their business and dispose some of their assets,” Gruia said.
Nortel has been trying to sell its Metro Ethernet Networks business unit and may also look to spin-off its enterprise segment, he said.
“It is a buyers market,” Gruia said. “Nortel needs to stay focused and not pull the trigger on the first offer they get.”
According to published reports. Nortel has received offers for its Ethernet unit that range from $1 billion to hundreds of millions.
Scaring partners, customers
With the bankruptcy filing, Nortel may lose some of its customers because of its uncertain future, Gruia said. Competitors will also reach out to the company’s customers.
“It is difficult for companies to work with a company that they are unsure will be around,” he said.
Gruia said Nortel may offer discounts to keep customers.
Zafirovski said Nortel remains committed to serving its customers 100%.
Already, some of the company’s partners are distancing themselves. Network and equipment testing company Catapult Communications Corp. said it “has no material financial exposure as a result of bankruptcy filings by Nortel.” The company said Nortel accounted for less than 2% of its revenue in fiscal 2008.
Nortel also announced that it amended its current supply agreement with Flextronics International Ltd. The amendment calls for Nortel to purchase $120 million of existing inventory by July 1 and to make quarterly purchases of “other inventory and to terms relating to payment and pricing.”
Singapore-based Flextronics said in a statement it has been “proactively engaged in executing a risk mitigation plan with respect to its relationship with Nortel for a period of several months,” and that last month it hired The Blackstone Group as its financial advisor in evaluating its relationship with Nortel.
Flextronics stock was down more than 11% on the news to $2.66 per share.
Following Nortel’s bankruptcy announcement, Standard & Poor’s Rating Services lowered its long-term corporate credit rating for Nortel six notches to “D” to “B-.” The service also said it lowered the issue ratings on all of Nortel’s unsecured notes to “D.” As of last September, Nortel has about $4.5 billion of debt. The rating service also lowered the issue-level ratings on Nortel’s $750 million preferred shares outstanding to “D” from “C.”
Since 2005, Nortel has been undergoing a transformation and Zafirovski said the company has made strides with a number of accomplishments. However, the company reported it lost $3.4 billion in the third quarter and announced plans to cut jobs and preserve cash.
Moody’s Investors Service downgraded Nortel’s rating last month just days after the company reportedly sought legal counsel regarding protection from its creditors and received a delisting notice from the New York Stock Exchange.
Because of the current economic crisis, other infrastructure companies may be on the same path as Nortel, Manjaro said.
Carriers are cutting back their spending on infrastructure and CDMA vendors are facing a lean year because build out for 3G networks is approaching maturity.
“This may mark the beginning of other companies filing for bankruptcy,” Manjaro said. “It’s survival of the fittest.”
Article updated substantially Jan. 14 to include additional comm
entary and analysis.