May 17, 2009 / 7:16 PM / 8 years ago

Nortel may shrink, but it won't vanish

5 Min Read

<p>The Nortel Networks Corporation logo is shown outside their office building in Toronto, January 14, 2009.Mike Cassese</p>

TORONTO (Reuters) - Nortel Networks Corp will most likely sell off most of its pieces at fire-sale prices as part of its bankruptcy restructuring, but experts do not expect one of the most storied names in Corporate Canada to disappear altogether.

Under the bloated exterior of what has become an outgunned has-been, analysts see a rump operation with the potential to be a viable company with a chance to succeed in one segment of the telecom equipment business.

When the dust finally settles, the only remnant of the once mighty Nortel expected to be left is Metro Ethernet Networks (MEN), the unit that makes Internet infrastructure and includes its optical and carrier ethernet technology.

The MEN unit includes a promising new technology that lets telecom companies quadruple the capacity of their networks using fiber-optic cables thinner than a human hair.

Telecom companies are looking for ways to quickly and cheaply boost their network bandwidth to meet exploding demand driven by online video, music and gaming.

"It would be smaller, obviously, but it would be a viable company capable of competing in that space," said Duncan Stewart, an analyst at DSAM Consulting in Toronto who has followed Nortel since 1990.

Nortel tried to sell the MEN unit last year, before pulling the plan in early February when no bids materialized. Some analysts blamed the weakening economy on the absence of interest. The MEN business generated $360 million in first-quarter revenue, accounting for about 21 percent of Nortel's total sales.

"This really is the jewel in the crown," independent technology analyst Carmi Levy said of MEN. "The good news is that as the economy comes out of the recession, this is the one unit that is optimally positioned for growth."

A fire sale at Nortel, North America's biggest maker of telephone equipment, would mark the latest chapter in its long decline. The one-time technology darling first faltered when the tech bubble burst in 2000 and repeated attempts at a comeback since then have failed.

Once a company that could do no wrong, Nortel employed more than 90,000 people that year and movements in its eye-popping stock price had the power to sway both the Toronto and New York stock exchanges.

Today, it employs about 30,000 and that number is dropping. Its stock trades at just 23 Canadian cents, down from its consolidation-adjusted high of more than C$1,100 during the boom.

Climate Is Not Advantageous

Nortel stands on the precipice of business oblivion just as the worst economic crisis in decades is roiling global markets.

Interest in Nortel's assets from players such Siemens Enterprise Communications, partly owned by Siemens, has surfaced but the weak economy has discouraged a deal.

Media reports have said Nokia Siemens Networks, another joint venture partly owned by Siemens and Nokia, and Avaya Inc have also been interested in parts of Nortel.

"Really, the only choice that they have is to sell off what they can ... when the offers present themselves," Levy said. "Unfortunately, the market for that right now is not advantageous."

Creditors are currently effectively in control at Nortel, also likely pressing the Toronto-based company to sell assets -- and fast.

The same creditors will also need to be convinced they stand to gain more by restructuring Nortel into a nub of what it used to be, with the MEN business at its center, rather than selling each and every unit to the highest bidder.

So far, Nortel has been unable to sell MEN "for a price that they think is reasonable, but ... the management team and the board are no longer in the driver's seat," said Iain Grant, managing director at telecom consulting firm SeaBoard Group.

He said Nortel may be forced to entertain any offer that materializes and not just ones it views as lucrative.

The one Nortel unit that analysts say the company will almost certainly sell is the carrier networks division, which sells technology and networks to telecom companies. As Nortel's biggest unit, it generated revenue of $737 million in the first quarter of 2009, down 32 percent from a year earlier.

Telecom companies have cut spending during the recession, hurting equipment vendors like Nortel. Some potential customers are also put off by the bankruptcy filing, the company said, making them reluctant to do business with Nortel.

"Even if they get kind of a stink bid, it's not a viable company and it doesn't fit," Stewart said of the carrier networks unit.

What's certain is that Nortel needs to move fast.

Total revenue plunged 37 percent in the first quarter and even though Chief Executive Mike Zafirovski insists sales are now stabilizing, he acknowledged in a recent interview that "time is the enemy."

($1=$1.17 Canadian)

(The Bay Street week-ahead column appears every Sunday. Comments or questions on this one can be e-mailed to wojtek.dabrowski(at)thomsonreuters.com)

Reporting by Wojtek Dabrowski; Editing by Frank McGurty

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