Nortel opts out of optical, plans to purge payroll

In its attempt to streamline for profitability, Nortel Networks Corp. has sold parts of its optical components business to a British firm for US$108 million. While the move could see some Canadian employees lose their jobs, it also might help the firm stay focused on its core competencies, according to one industry analyst.

The Brampton, Ont.-based telecom gear maker on Oct. 7 said it would let go its optical transmitter and receiver business, as well as the pump lazer and amplifiers business, and sell them to Bookham Technology plc, an optical component maker headquartered in Abingdon, Oxfordshire, U.K.

“This sale is part of Nortel Networks’ efforts to streamline our business around or core market areas…align our cost structure, focus on returning to profitability and focus [on] investments that will deliver the key next-generation solutions in those areas,” said Nortel spokesperson Tina Warren, in Brampton.

Nortel’s decision could be painful for some of its Canadian employees. Approximately 300 people will lose their jobs when the firm completes the Bookham deal. The transmitter and receiver business keeps a location in Ottawa.

Nortel would not divulge just how many Canadian employees would be affected, saying it “does not provide a breakdown of numbers by region or city.” The company added that approximately 1,300 employees worked in the optical component business at six sites around the world. Approximately 1,000 of those employees will have the opportunity to work for Bookham if the deal goes through.

The sale goes towards reducing Nortel’s headcount. The company said in August that it would cull 7,000 employees from the roster in its bid for a total workforce of 35,000 employees (compared to 44,700 in Q2 2002). Nortel said cuts resulting from the Bookham deal are “part of the 7,000 previously announced.”

Nortel in May said it would re-jig its optical longhaul business and consider options for the components arm. Judging by the words of Kevin Lo, technology analyst with Lightyear Capital Inc. in Calgary, the sale to Bookham is in accordance with the company’s outlook.

Lo said Nortel got into optical components so it would have greater supplier choice. JDS Uniphase Corp., a fibre-optic component builder with Canadian headquarters in Ottawa, owns this market, he said. Nortel wanted to increase the scope of optical suppliers available, and so created its own unit.

But Lo said Nortel’s heart was never in the business, thus the sale makes sense to a certain degree.

It also makes sense considering the company’s share price these days. On the New York Stock Exchange (NYSE), a Nortel share costs less than US$1.

According to rules listed on the NYSE Web site (“Listed Company Manual” section 802.1C) companies below the US$1 threshold have six months to “cure” the situation. If they can’t, companies face “delisting and suspension” from the exchange.

Lo said a company delisted from the NYSE would lose access to the largest pool of capital in the world, adding that the situation would hurt the firm “financially” if not from an “operational” perspective.

Nortel in September acknowledged its poor performance on the NYSE and announced plans to enact a “reverse stock split,” whereby shareholders trade in multiple shares for one, consolidated share. Lo said Nortel would likely go for a 20-to-one consolidation, which would put the share price up to approximately US$10.

The Bookham agreement is contingent on approval by Bookham’s shareholders, who will vote on the deal in the future. Nortel did not specify when, but said in a statement issued Monday, “The transaction is expected to close in the fourth quarter of 2002.”

If the shareholders approve the deal, Bookham gains control of the transmitter and receiver business, as well as the pump and lazer amplifiers business. Nortel gets 61 million Bookham shares and US$10 million in cash as “reimbursement for certain restructuring expenses incurred in connection with this transaction,” according to the statement.

Bookham will take over existing customer contracts, the statement said. As well, for the first 18 months of the agreement Nortel will purchase at least US$120 million-worth of Bookham products.

Warren from Nortel said the company would return to its roots and profitability.

“Going forward, we will focus on our leadership in optical systems and work with our suppliers to ensure access to high performance, low cost optical components. Our focus is to bring all our business units into a profitable position. The sale today will help us do that.”