Ottawa could stop Nortel-Avaya deal

Industry Canada announced Thursday it will only allow Avaya Inc. to buy Nortel Networks Corp.’s enterprise business if Avaya can prove the US$915 million deal is beneficial to Canadians.

“Let’s be honest. They’re not going to block the sale,” said Mark Tauschek, lead analyst at London, Ont.-based Info-Tech Research Group. “What are the options?”

Industry Minister Tony Clement announced the review despite the fact that he is not reviewing the more expensive foreign acquisition of Nortel assets. LM Ericsson of Sweden has agreed to buy Nortel’s carrier wireless assets for US$1.13 billion.

“Avaya filed an application for review under the Investment Canada Act (ICA) of its proposed acquisition of Nortel’s Enterprise Solutions Division,” Clement stated in a press release. “The Nortel assets being sold to Avaya exceed the threshold set by the ICA ($312 million); therefore a review is automatically required. I only approve applications where the investor demonstrates that its investment is likely to be of net benefit to Canada.”

Nortel has been operating under bankruptcy protection since Jan. 14, and is trying to sell most of its business assets to repay creditors, including bond holders and former employees who are owed severance pay. The telecom equipment maker – founded in 1895 as Bell Canada’s hardware manufacturing arm and known for years as Northern Electric – once dominated the Toronto Stock Exchange but has lost money nearly every year since 1998.

Avaya originally announced in July it wanted to buy the Nortel enterprise business for US$475 million but two other bidders – rumoured to be Siemens Enterprise Communications and private equity firm MatlinPatterson – also placed bids. So an auction was held earlier this month and Avaya won after increasing its bid to US$915 million.

If Industry Canada turns down Avaya’s application, then Tauschek assumes the next option is for Siemens – also a foreign company – would acquire the assets.

The Investment Canada Act requires a review of all foreign acquisitions, if the buyer is based in a member of the World Trade Organization, and the value is greater than $312 million.

That threshold, in the past, referred to the book value. Although Parliament changed that to the enterprise value, that change had not taken effect by the time Ericsson agreed to buy the carrier wireless assets.

In testimony before the House of Commons Standing Committee on Industry Science and Technology Aug. 7, Nortel Chief Strategy Officer George Riedel said the “book value” of what Ericsson is buying is only US$149 million.

The book value of the enterprise assets Avaya wants to buy was not immediately available.

“Avaya recognizes the authority and jurisdiction of the Minister of Industry, respects the process and looks forward to working with Industry Canada and the Investment Review Division to finalize a transaction that we believe will bring inherent benefit and value to Canada,” an Avaya spokesperson stated in an e-mail to Network World Canada.

A Toronto-based analyst predicts Avaya has committed to hiring the majority of Nortel employees currently in the enterprise unit.

“Avaya wants to make sure they get the nod from the Canadian government,” said Ronald Gruia, program leader for emerging telecoms at Frost & Sullivan. “They will say and do all the right things.”

Gruia noted since 1985, Industry Canada has reviewed 1,500 applications from foreign companies to buy Canadian firms and rarely rejects them. One exception was an attempt by Minneapolis-based Alliant Techsystems Inc. (ATK) to acquire part of Richmond, B.C. defence contractor MacDonald, Dettwiler and Associates Ltd.

MDA agreed in January, 2008 to sell its information systems and geospatial service group to ATK, but Industry Canada rejected that deal because the industry minister at the time, Jim Prentice, was not satisfied the deal would be of net benefit to Canada.

ATK’s bid sparked concerns over national security. MDA’s services include: satellite ground stations; unmanned aerial reconnaissance (UAV) training for Canadian Forces in Afghanistan; service and spare parts for the Canadian Forces’ CP140 Aurora airplanes, used to patrol Canada’s coasts looking for foreign surface ships and submarines; and the Canadian Space Agency’s Radarsat 2 satellite.

Gruia noted the rejection of MDA’s agreement with ATK was an exceptional case.

“It is not a foregone conclusion that the Canadian government” will approve Avaya’s bid for Nortel’s enterprise assets, he said. But he added it will be easier for Avaya to get its bid approved by the Canadian government than by the U.S. Department of Justice Anti-trust division, which will examine the effect the deal would have on market share.

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