Nortel bankruptcy might be a good idea: UBS

It might make sense for Nortel Networks Corp. of Brampton, Ont. to declare bankruptcy sooner rather than later in an effort to be in as strong a position as possible when it happens, an industry financial analyst says.

Under the heading “Nortel: January bankruptcy filing?” UBS analyst Nikos Theodosopoulos suggests that declaring bankruptcy first thing next year “may make sense to maximize franchise value.”

The global economic recession in conjunction with looming debt payments don’t make for a promising 2009 for the company, which is already reported to have hired advice about declaring bankruptcy, Theodosopoulos says in an e-mail newsletter.

Nortel has an interest payment on debt due Jan. 15 between $100 million and $120 million, and he thinks executives may decide to forego paying it as the better choice long-term.

The company had a tough time in the fourth quarter, the analyst says, following a $3.4 billion net loss in the third quarter. At the time, Nortel said it plans to lay off an additional 1,300 workers, in order to save $290 million next year on salaries. The telecom equipment maker announced it would be organized into three units: carrier networking, metro Ethernet network and enterprise. The global services group will not longer exist as a separate division but will be split among those three.

Nortel reported Nov. 10 that as of Sept. 30, it had US$2.3 billion in cash, down from US$3 billion three months earlier. Total long-term debt was US$4.6 billion, though only $20 million of that is due within a year.

As time goes by, it may become more difficult for companies declaring bankruptcy to find financing to do so, Theodosopoulos notes. All that adds up to a hard decision.

“We believe a likely challenging 4Q08, weakening 09 outlook and tightening DIP financing may cause Nortel to withhold its interest payment and possibly pursue an early bankruptcy,” he says.

Matters could become more complicated if Nortel has trouble finding a buyer for its metro Ethernet networking division, which the company put up for sale in September, and if it has trouble obtaining assistance from the Canadian government, he says.

Theodosopoulos’s report comes less than a month after rumours surfaced that Nortel was seeking legal advice about a possible bankruptcy.

At the time, Nortel did not deny it had sought legal advice but stressed its cost-cutting plan announced Nov. 10 had not changed.

Nortel was originally the mechanical department of Bell Canada, and was spun off as Northern Electric Manufacturing Co. in 1895. Bell Canada Enterprise (BCE) Inc. was Nortel’s largest shareholder until 2000.

Last June, the RCMP charged Frank Dunn, Nortel’s CEO from 2001 until 2004, with fraud, alleging he mis-stated Nortel’s financial results, made “false entries and omitted materials” in financial documents and “circulated or published” material “knowing that it was false in a material particular, with the intent to deceive or defraud the members, shareholders or creditors” of Nortel.

Nortel replaced Dunn with retired U.S. Navy Admiral William Owens, who was later replaced by Zafirvoski, who had been chief operating officer at Motorola.

In the enterprise space, Zafirovski got the company focusing on unified communications, and nearly two years ago, Nortel announced a partnership with Microsoft Corp., in which Nortel’s communications Server would have interoperability with Microsoft Exchange Server 2007 Unified Messaging.

Last summer, the companies announced a hosted unified communications service, targetteed at small to mid-sized organizations who don’t want to buy their own PBX. The service is based on Nortel’s communications Server 2000 and Microsoft Solution for Hosted Messaging and Collaboration Version 4.5 (HMC 4.5).

With files from Greg Meckbach

Related Download
Real-time visibility Sponsor: Interactive Intelligence
Real-time visibility
Get real-time visibility in the contact centre. See immediate benefits. Real-time visibility in the contact centre is crucial. When you do not have the info you need to make decisions, you lose out on the single best way to create a competitive advantage. Solving this issue is simple, though.
Register Now