Will Nortel prevail as a patent licensing firm?

Nortel Networks Corp. of Toronto is “reviewing a number of options” for the parts of the company that are not for sale, said George Riedel, the firm’s chief strategy officer.

Riedel made his remarks in testimony Friday before the House of Commons Standing Committee on Industry, Science and Technology.

Nortel, which has lost money 11 of the past 12 years, has been operating under bankruptcy protection since January. It has been trying to sell its metropolitan Ethernet unit for nearly a year, and has agreed to sell its enterprise business to Avaya Inc. for US$475 million.

Last month it agreed to sell its carrier wireless assets to LM Ericsson of Sweden for US$1.1 billion, but the deal is under scrutiny by the Canadian government.

This is because after an earlier bid by European joint venture Nokia Siemens Networks, Research in Motion said it was prevented from bidding, and called on the federal government to review the sale.

This eventually led to Friday’s emergency hearing of the parliamentary committee.

A few committee members said they have heard from retired Nortel employees who are concerned about their pensions.

Anthony Rota, the Liberal Member of Parliament for the Northern Ontario Riding of Nipissing-Timiskaming, is one of those members, and asked Riedel several questions.

“Will Nortel to continue to exist after this?” Rota asked, and will Nortel remain as a research company that licences patents.

“If so where will the income stream go to? Shareholders? Pensioners? Or to a third party taking over a shell company?”

Riedel said the “principal businesses of Nortel will be sold,” adding he expects bids to be placed by the third quarter.

Nortel will keep its Long Term Evolution (LTE) patents if Ericsson’s bid is successful, though Ericsson would have the right to use the patents for a licensing fee.

As of Friday, no company had publicly bid for the metro Ethernet unit, and Avaya was the only firm vying for the enterprise business, but Riedel said sales of the principal businesses may close either the fourth quarter of 2009 or the first quarter of 2010.

As for the patents, Riedel testified, “no process has been put forward to deal with those,” and the goal is to sell the assets first.

“We’re reviewing a number of options,” he replied to Rota. “We will have to get the monitor, courts and creditors to approve the process.” By monitor, he was referring to Ernst & Young, which has been appointed by the courts.

In reply to a question from committee member Brian Masse, the New Democratic Party Member of Parliament for Windsor West, Riedel said the book value of the assets Ericsson wants to buy is $149 million.

Riedel said Nortel has been advised this is the figure Industry Canada would use to determine whether a review is required by the Investment Canada Act, which mandates a review of all foreign acquisitions exceeding $312 million.

Ericsson has agreed to pay more than US$1 billion, and the book value was calculated by adding current assets of $111 million to fixed assets of $38 million. Asked why Ericsson would offer more, Riedel said Ericsson would see greater value in the intangible assets, including customer relationships and the potential for growth.

Masse said it was his understanding the $312 million cutoff in the Investment Canada Act refers to the “enterprise value.”

But in later testimony, Industry Canada officials confirmed the $312 million refers to the book value.

Marie-Josee Thivierge, Industry Canada’s assistant deputy minister for small business and marketplace services, said she is prohibited by law from discussing specific cases, but said the book value would be determined using the most recent audited financial statements, prepared according to generally accepted accounting principles (GAAP).

During Riedel’s testimony, another committee member, Bloc Quebecois MP Mario Laframboise, said through a translator the “real value is more important than the book value.”

Riedel replied: “My understanding is the government’s been clear is that the book value is the test.”

Marc Garneau, a Liberal MP and former astronaut, asked Riedel for details on Nortel’s requests for federal bailout money.

Riedel said there were 13 meetings between Oct, 6, 2008 and last June with government officials.

“The feedback we got was the government did not see (Nortel’s) plans as viable,” Riedel said. He added Nortel was told “there were no overarching national issues,” at stake and the “Nortel brand was tarnished.”

Garneau later asked Richard Dicerni, deputy minister for Industry Canada, if this is what Industry Canada officials had told Nortel.

“Those are not my comments or I think any of my staff,” Dicerni replied.


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