Nortel bidders likely to wait for a bargain

Nortel Networks Corp. could be looking at a possible sale price of about $1.3-billion (U.S.) in its bid to sell two core assets.

But analysts wonder how quickly potential buyers will bite, suggesting they might hold off as long as possible to pick up what they can as cheaply as possible.

Nortel is seeking to unload its carrier networks and enterprise solutions businesses rather than emerge from bankruptcy protection. Analysts offered a wide range of valuations for the two businesses, anywhere from $1.3-billion - 20 per cent of 2008 sales - to the full $6.7-billion the two divisions generated last year. Most, however, believe any bids would be toward the lower end of that range.

Nortel filed for protection from creditors in January, pledging to restructure and emerge as a smaller company with less debt. However, difficulties in obtaining financing for restructuring and concerns that a new Nortel wouldn't have a leading product upon which to build a foundation have shifted the focus to carving up the company to raise as much money as possible to pay back creditors, who are owed more than $6.3-billion.

Andy Woyzbun, lead analyst at Info-Tech Research Group in London, Ont., said selling the individual businesses makes by far the most sense for Nortel. No one is going to inject money into the current entity "to set Nortel straight," so the only likely scenario is that other telecom companies will go after "good meaty parts," he said.

Nortel is shopping its two largest business divisions. The carrier networks division, which builds the equipment that carries cellphone calls, generated sales of $4.3-billion last year. Nortel's enterprise solutions business, which makes office telecom equipment, brought in sales of $2.4-billion in 2008.

Selling off the company's wireless equipment business, which generates about 45 per cent of the company's sales, would make it difficult for Nortel to emerge from bankruptcy protection as a viable company.

Potential buyers, which are all foreign-owned, include Avaya Inc., backed by a private equity consortium, as well as Nortel competitor Siemens Enterprise Communications, which is reportedly interested in the wireless equipment business.

Nortel clients, in particular, want to have the businesses remain intact, and they would like to see them sold as soon as possible, Mr. Woyzbun said.

"It will be good news when Nortel finally announces what they are going to sell to whom," Mr. Woyzbun said. "From the point of view of the customers or prospective customers it is going to eliminate a lot of the uncertainty."

The buyers will likely be large players, such as Cisco Systems Inc., who have access to the cash needed to pump up the Nortel businesses, he said. Cisco, however, reportedly inquired about Nortel's enterprise unit but chose not to enter a bid.

Zeus Kerravala, an analyst at the Yankee Group, said he thinks many potential buyers will wait so they can get Nortel's assets as cheaply as possible. With the economy so weak, the value of Nortel's assets will likely continue to fall over time, he said.

The enterprise division is likely the most valuable asset, Mr. Kerravala said, and could draw a bid as high as $1-billion or more, as long as the debt was left behind.

The trick for buyers will be financing. Lining up loans for a $1-billion asset purchase used to be no problem, but in today's moribund credit markets, it can be very tough. That has left Nortel looking at alternative ways to extract some value for creditors from the divisions in case an outright sale doesn't work, sources said.

One possibility is to create joint ventures, sources said, where Nortel would retain a stake in the businesses. That would require less cash outlay from potential suitors. In that case, Nortel's creditors could end up holding shares in the ventures, rather than getting cash payments.

With files from reporter Boyd Erman

NORTEL (NT)

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