Nortel contemplates bankruptcy

Nortel has hired lawyers to consider whether it should seek bankruptcy protection, but the company says it has made no decision to do so.

It will instead follow the restructuring and cost-cutting plan devised last month.

“On November 10th, we put in place an aggressive plan to bring down costs by $400 million with a minimum level of cash outlay. The goals we laid out on November 10th have not changed,” the company said this morning in response to a Wall Street Journal story that the company was seeking legal advice to explore bankruptcy.

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The culture at Nortel

In that story, a Nortel spokesman is quoted as saying no bankruptcy filing is imminent. Its statement on Wednesday does not deny that it sought advice on bankruptcy. The company says, “Nortel is a viable partner for the long term. We have no debt maturity until 2011, and we are preserving and strengthening our case position.

“We remain focused on executing a significant shift to our operating model and cost base to reflect the economic environment that we are now in. Our commitment is to remain an innovation-driven organization — delivering value to our customers for the long term.”

The statement says that two weeks ago, Standards & Poor’s, which ranks credit ratings for businesses, said, “Nortel should be able to maintain adequate levels of liquidity in the next 12-18 months.”

Iain Grant, managing director of the SeaBoard Group, a Montreal-based telecom consultancy, said bankruptcy protection has to be an option for a company in Nortel’s position. On the other hand, he said that a number of large companies have gone that route – such as Air Canada – and emerged stronger. Restructuring “would give [Nortel] considerable breathing room. “Don’t be panicked by it, I would suggest to their customers. It’s a normal course of business in these troubled times.”

“Nortel’s trading at 30 cents,” he added. “The company is worth more than that.”

In a commentary issued immediately after the Journal report, National Bank Financial said a bankruptcy protection filing now would be premature. Nortel’s earliest bond maturity comes due in July 2011, which is more than two years away, it noted. “Even considering our pessimistic free cash flow burn rate of $901 million in 2009, we forecast the company will end 2009 with $1.4 billion in cash.” National is “cautious on Nortel’s prospects of a successful turnaround in today’s challenging telecom market,” but with no short-term debt obligations and the possibility that Nortel can successfully reorganize itself, bankruptcy protection isn’t warranted in the near term.

The analysts still believe Nortel should have cut more than the 1,300 employees announced last month. It maintains an outlook of Nortel shares at 50 cents.

Nortel has suffered a major slide in profit over the past year, dipping into red ink last quarter. A year ago, Nortel had a net profit of $27 million in the third quarter, which plummeted to a net loss of $3.4 million. Between the same periods, revenues dropped 14 per cent.

The company’s market value, peaking at $250 billion in 2000, is now close to 0.1 per cent of that at $275 million.

The game plan articulated last month resulted in laying off 1,300 employees, plans for selling its metro Ethernet unit and getting rid of facilities. The company revised its revenue projections downward for this year, from a range of a 2 per cent to 4 per cent decline to a firm 4 per cent.

Among those laid off were some top executives, including CTO John Roese, Chief Marketing Officer Lauren Flaherty, Global Services President Dietmar Wendt and Executive Vice President Global Sales Bill Nelson.

Sale of the metro Ethernet division could be stalled by tight credit markets that might prevent interested buyers from being able to finance the deal.

The Toronto-based company has been trying to get the Canadian government to help bail it out, but the country’s legislature has shut down until January, the Wall Street Journal says.

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