IHS Global Insight Perspective | |
Significance | While unconfirmed, Avaya appears to be emerging as the frontrunner in the bidding for Nortel's enterprise unit with a price tag of around US$500 million. |
Implications | Nortel is not achieving high valuations for its businesses. In addition, creditors have voiced complaints over the manner in which the sale of the wireless business to Nokia Siemens was conducted last week. |
Outlook | Consolidating Nortel's enterprise business would confirm Avaya as the market leader marketing this segment. The creditors' action, led by MatlinPattersson, may delay finalisation of the deal, but it is difficult to see Nortel reversing into restructuring as a going concern at this stage. |
Nortel is close to signing a deal with Avaya to sell off its enterprise unit, reports the Canadian Globe and Mail. Avaya is a leading vendor specialising in products including contact centre solutions, conferencing systems, unified communications and telephony solutions, and was bought out by private equity companies Silver Lake and TPG capital for US$8.3 billion in October 2007, thus rescuing the business from its own financial and operational problems. Sources familiar with the situation are cited as putting a price tag of up to US$500 million on the deal, with major customers and resellers having been alerted of a deal in the offing, although the two companies have not yet directly confirmed the news.
This follows the confirmed agreement to sell Nortel's CDMA and LTE businesses to Nokia Siemens Networks for some US$650 million, and earlier agreements to sell certain portions of Nortel's layer 4-7 application delivery equipment portfolio to Radware. Both of these were agreed under 'stalking horse' agreements that allow Nortel a limited time to find other buyers at a higher price, which could also be used in the Avaya deal (see World: 22 June 2009: Nortel to Sell CDMA Business and LTE Assets to Nokia Siemens Networks and 23 February 2009: Radware to Acquire Nortel's Application Delivery Assets).
Meanwhile, Reuters reports that creditors have filed an objection to the Nokia Siemens agreement with MatlinPatterson, stating that restrictive conditions in the bidding process may have limited the opportunities for competing bids or for creditors to take control and run the business as a going concern. Reuters reports that a committee of unsecured creditors also noted, "Certain aspects of the bidding procedures serve to stifle rather than encourage active bidding at auction."
MatlinPatterson is seeking a two-week extension to the Nokia Siemens sale, while seeking discussions with other creditors over a potential Chapter 11 re-organisation plan that would restructure the company rather than dismantling it. The final sale hearings had been scheduled for 28 July in the United States and 30 July in Canada. Supplier Flextronics is also reported to be voicing concerns over the process.
Outlook and Implications
The enterprise unit generated US$2.4 billion or 23.0% of revenues for Nortel in 2008, before Nortel filed for bankruptcy protection in the first quarter of 2009 (see World: 3 March 2009: Nortel Network's Q4 Revenues Down 15% Y/Y Before Chapter 11). This was a fall in revenues of 8.3% year-on-year (y/y), which exacerbated operating margin losses for the business segment, raising them from US$8 million to US$75 million. Following the announcement that Nortel was seeking bankruptcy protection, revenues for the enterprise business continued to drop even more sharply, falling 34.4% quarter-on-quarter (q/q) and 40.9% y/y to just US$395 million for the first quarter. The bids for the businesses have been marked as low—hence the 'stalking horse'-type agreements so far confirmed, which are partly intended to set a floor for higher bids to emerge (see World: 8 April 2009: Nokia Siemens Makes Low Bid for Parts of Nortel—Reports). However, with economic conditions in the doldrums, finance is particularly squeezed and Nortel exacerbated the drop in capital spending on IT and telecoms with the Chapter 11 filing, so potential bidders have not been as forthcoming as Nortel may have hoped.
While figures are not available from the privately owned Avaya, it claims to take the number one position in its key markets of contact centres, telephony systems, enterprise messaging, unified communications and audio conferencing, competing mainly with Cisco Systems and Siemens Enterprise. Avaya has already claimed to benefit from the fallout in spending shifting from Nortel systems over uncertainty about Nortel's future impacted sales opportunities. Consolidating the Nortel business should add breadth and depth to Avaya's product portfolio, as well as enabling support for widely deployed legacy systems. Nortel generated US$124 million in services revenues in the first quarter, which while down from US$153 million in the fourth quarter also represents a source of continuing revenues and a major boost to Avaya's hardware maintenance and software support services.
Creditors may win a little more time to solicit bids, while a bid to gain control as a going concern is potentially viable. However, this would likely face serious operational difficulties in a company that appears to be heading towards a final break-up.