Nortel to sell metro Ethernet unit as buying slumps

Stung by a sudden drop in spending by businesses, phone and wireless companies, Nortel Networks is putting up for sale the division that makes its optical and carrier Ethernet products for service providers.

In a quickly-arranged conference call with financial analysts this morning, company president and CEO Mike Zafirovski said it doesn’t expect to make as much money this year as expected, and as a result it is hunting for buyers of its metro Ethernet unit to strengthen its balance sheet.

That will let it concentrate on its enterprise, wireless carrier and voice over IP products, including its unified communications servers.

“In today’s environment with our balance sheet, as much as a number of us may believe we can be successful in various segments, the view is it would be very advantageous to make some decisions and to help us focus on fewer areas where we can win, and at same process to monetize an asset that is highly valuable.”

Revenue this year will drop between two and four per cent compared to last year, the company said.

From talking to customers and reports from industry research firms as many as one-third of IT professionals recently have predicted their IT spending will either drop or stay the same compared to last year, Zafirovski said. The change it attitude has been sudden. Among customers in North America and Western Europe there has been “noticeable decrease in level of commitment” to buy hardware this quarter, the CEO said. He added that the in the last four weeks Nortel’s sales team has seen a change in customer intentions over three months ago.

He emphasized that he believes this is an industry-wide slowdown in spending and not directed at Nortel.

However, it isn’t clear if spending is slowing around the world who could afford to buy the division. Zafirovski was asked directly by one analyst if Nortel has seen interest recently from “motivated buyers” or is just putting it on the market. Zafirovski replied that he would give details of any discussions it might be having, but did say it was using an outside investment banker for advice.

“The metro Ethernet division has value,” Iain Grant, who heads the telecom consultancy the SeaBoard Group, wrote in an e-mail interview. It’s “never going to burn down the barn with growth, but (it is) solid business.

“Many of Nortel’s hopes for the future (like investments in next generation wireless) are still in the incubator,” he added. “These bets will have big payoffs down the line, bigger than the metro Ethernet business, but need time, money and smarts to realize.”

Nortel’s announcement came in advance of the company’s third quarter financial results, scheduled to be released in the first week of November and was obviously done to make sure there would be no surprises then to the financial community. The metro Ethernet products are aimed at service providers who are trying to convert traditional Ethernet into a carrier-class technology. As a result they will be able to deliver multiple high bandwidth products such as IPTV, mobile video and business connectivity services.

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