Sale of key Nortel assets may be inevitable

Nortel Networks may have no choice but to sell off key parts of its business, industry analysts said after reports that the company is in talks with competitors to do just that.

Nortel (TSX: NT) has had discussions with rival vendors about buying both its mobile infrastructure business and its enterprise networks unit, according to a published report that cited unnamed sources familiar with the matter. The company filed for bankruptcy protection in January after struggling with a financial scandal and a string of financial losses.

It has already sold its application acceleration business and pulled out of the mobile WiMax market, along with announcing thousands of layoffs, though it is reconsidering the possible sale of its metro Ethernet unit. When it filed for bankruptcy, Nortel said it expected to emerge from a reorganization as a more focused and financially sound operation. But selling the wireless and enterprise divisions would gut the once-giant communications technology company.

Nortel is a significant player in the areas of carrier wireless infrastructure in which it still competes, and it has a large customer base for its corporate phone and data networks.

Without those two businesses, Nortel would be a collection of operations including its metro Ethernet business — if that is not sold — traditional wireline carrier equipment and consulting services.

Bankruptcy law requires that Nortel’s affairs be resolved in a way that delivers the maximum value to bondholders and others to whom the company owes money, JMP Securities analyst Sam Wilson pointed out. In many bankruptcy cases, that involves keeping the company intact and making them shareholders.

But if Nortel can realize more value by selling off its biggest businesses, it has to do so, he said. Wilson believes parts of the company will be sold.

Other observers agreed.

“I don’t think there’s any way Nortel can make it without splitting up,” said Yankee Group analyst Zeus Kerravala. And the wireless and enterprise units are the most promising candidates. “There are only so many parts of the business that have value,” he said.

The main draw for Nortel’s enterprise business might be its roster of customers, according to Kerravala. Avaya, the main rival to Cisco Systems in IP (Internet Protocol) telephony, has a hard time attracting new customers because it’s perceived as a legacy equipment company, he said. (Avaya traces its roots to the old U.S. Bell System.) Buying Nortel would give them easy access to companies that use that company’s gear today.

Cisco itself might be a plausible buyer for Nortel’s wireless business, said IDC analyst Godfrey Chua. Nortel has a well-respected product portfolio in both CDMA (Code-Division Multiple Access) and GSM (Global System for Mobile Communications) and related 3G (third-generation) systems, he said.

Cisco sells mobile operators gear for the core of their networks, such as routers, but not the actual wireless base stations at the edge that communicate with subscribers’ devices. The edge is where cellular companies make roughly 60 per cent to 70 per cent of their network investment, so it could be a lucrative piece of the pie for Cisco as operators migrate to 4G, he said.

“Carriers just don’t think of Cisco when they think of 4G,” Chua said. With both the core and the edge, “they could potentially have a huge business on their hands.”

For Cisco, Nortel would not be a very expensive company to buy, even outright, Chua said. When its shares on the New York Stock Exchange stopped trading the day before the bankruptcy filing, they were worth only $0.32 each. But the real cost lies in the pension obligations built up by the company over a history of more than a century.

“It’s the debt burden you’d have to take on that’s really making it hard to sell Nortel now,” Chua said.

For customers, the hardest part is waiting.

“It’s hard to invest in any product Nortel has, because you just don’t know what the company is going to have in its portfolio post-restructuring,” Kerravala said. But he thinks whatever happens will be resolved within a year.

For potential acquirers, it will all come down to striking the right price, JMP Securities’ Wilson said.

“It’ll be a messy situation all around. Interesting, but messy,” Wilson said.

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