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Nortel's Not Bankrupt Yet

Craig Matsumoto
News Analysis
Craig Matsumoto
12/10/2008
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Nortel Networks Ltd. might not be prepared to file bankruptcy any time soon, but the mere thought appears to be sending the stock reeling.

The company's shares on the New York Stock Exchange (NYSE) are down more than 25 percent today following a Wall Street Journal report that the company is seeking advice on the possibility of a bankruptcy filing. (See Nortel's New Chapter.)

No such move appears imminent. Between $2.6 billion in cash as of October and a decent credit rating, the company should be good for at least 12 to 18 months of liquidity, a Nortel spokesman told the Journal.

Today's stock plunge -- down 14 cents to 38 cents per share at press time -- brings Nortel's market capitalization to less than $200 million. As recently as September, Nortel was worth $1.5 billion. (See What's Nortel Worth?)

"It's killing the stock -- and the bonds, too," says one analyst requesting anonymity.

Whether today's report presents any markedly new information is debatable, as the possibility of a Nortel bankruptcy has been on people's minds for some time.

"It would be appropriate for them to start those kinds of discussions," even though Nortel isn't on bankruptcy's doorstep, says Barry Richards, an analyst with Paradigm Capital Inc.

Analyst Mark Sue of RBC Capital Markets recently shrank his target price for Nortel stock down to $0 -- yeah, zero -- in a Nov. 13 report ominously entitled, "The Last One."

"We think bankruptcy is a distinct possibility down the road," he wrote. He added that Nortel's cash should be enough to get through 2009, although things could get dicey after that.

Along similar lines, the fact that Nortel's bonds were trading at less than 21 to 41 percent of face value in November was a bad sign for the stock, analyst Kris Thompson of National Bank Financial wrote in a report back then. "If the bonds holders don't make it out at face value, then the equity shareholders are generally holding a worthless investment," he noted.

In trying to right the ship, Nortel CEO Mike Zafirovski has announced another round of job cuts and a plan to sell the Metro Ethernet Networks division. (See Nortel Culls 1,300 Jobs, Loses $3.4B, Crunch Time for Nortel, Nortel to Sell Carrier Ethernet, Optical Biz, and The Heavies Weigh In on Nortel.)

The MEN sale doesn't appear to be going anywhere, though. The Journal reports "nearly a dozen" potential buyers have looked at the division without coming to a deal. And analysts talking to Light Reading in recent weeks haven't come up with any new possibilities for buyers; many think Huawei Technologies Co. Ltd. remains Nortel's best bet. (See Huawei Seen as Likely Nortel Suitor.)

Nortel's future might not hinge on that sale anyway. Thompson's analysis says that even a sale price of $875 million, after subtracting out debt, wouldn't be enough to bring Nortel's bond levels above water.

One possibility that's been raised -- and one that Nortel is reportedly investigating -- is a government bailout, something that's been proposed (had you heard?) in certain U.S. industries recently.

Government involvement wouldn't be unprecedented, given the number of qualified pensioners Nortel has. "It's an enormous number to our population, the same way the auto industry is to the U.S. population," Paradigm's Richards says.

— Craig Matsumoto, West Coast Editor, Light Reading

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Stevery
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Stevery,
User Rank: Light Beer
12/5/2012 | 3:25:27 PM
re: Nortel's Not Bankrupt Yet
Between $2.6 billion in cash as of October and a decent credit rating,

What was the last set of corp bond you've read about in this industry? More than a month ago? Forget it, that road is closed.

And here's what they probably got told for bankruptcy advice: Forget ch 11 (reorg) because nobody is going to spot you the DIP financing. So it's ch 7 (asset sale).

At least, that's what they would have been told in the US. Who knows what the canucks have for bankruptcy code.
inauniversefarfaraway
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inauniversefarfaraway,
User Rank: Light Beer
12/5/2012 | 3:25:26 PM
re: Nortel's Not Bankrupt Yet
"canucks have for bankruptcy code"

<rant on="">

It the long tradition the Nortel has cultivated: let the assets wither on the vine and pay somebody to take it off your hands.

Welfare for the gang, since they haven't accounted for the pension liabilities and severances. ;-)

Technically, they're already in default.

Let's see $2.6B in cash, was it $1.4B in pension liabilities? (That has mysteriously disappeared from the radar) $1B running loss (best case scenario), $1.xB to run the shop. They're trying to "save" $400M! Perhaps the amusing sale of a prized division, wait, that's a mirage too since they've given up on the iron (rust).

What can the minority (Tory) Government do at this stage, save this elephant, infuse a few more quarters of life, nationalise the company (contrary to tory philosophy)?

The best way to buy votes is to break the thing, kick the pensioners out and start fresh. The aspiring pensioners are killing this company, no new blood wants in on the Titannic, they instantly become disposable. The entrenched clique lavishes credit and reward on their colleagues to max out their pensions. Class systems are doomed, how many times has this been demonstrated in history? On top of this, they're in a competitive and now starved environment instead of the comfy duopoly of regulated telcos.

Start with a new team, follow Japanese style management with an inverted salary scale, value innovation. Whatever this is now, it ain't working.

Let's face the facts, Nortel has spent most of it's time destroying innovation. Many will agree it was a nice place to work, once upon a time. All that is left is a bunch of cut-throats. A long vacation will give them some time to think about what they've managed to destroy. The road to hell is paved with good intentions.

They want everybody to think they're long term to get the jump on everyone else, classic Machiavellian. This is bankruptcy thinking.

The show must go on, thanks for the laughs. It is as spectacular an ending as imagined.</rant>
sanchin
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sanchin,
User Rank: Light Beer
12/5/2012 | 3:25:26 PM
re: Nortel's Not Bankrupt Yet
May we all live in interesting times...

Another perspective on all the gloom and doom is from another analyst forecasting that based on free cash flow NT would still have $1.4B USD by end of 2009 which could be sufficient to reorg.
See excerpt from link from The Deal.com:
http://www.thedeal.com/techcon...


Excerpt:
In a research report issued in response to the Journal story on Wednesday, analyst Kris Thompson of National Bank Financial, argues that Nortel has more than enough cash to get it through 2009:

"Nortel's earliest bond maturity comes due in July 2011, which is more than two years away. Even considering our pessimistic free cash flow burn rate of $901 mln in 2009, we forecast the company will end 2009 with $1.4 bln in cash. While we are cautious on Nortel's prospects of a successful turnaround in today's challenging telecom market, our view is that Companies' Creditor Arrangement Act (CCAA) protection (which essentially means bankruptcy in Canada) is premature today. With no short-term debt obligations and the possibility that Nortel can successfully restructure, we would not expect CCAA as a near-term consideration by the company"

Given that: the Canuck Govt. is considering other corporate bailouts; NT is one of the largest employers in the country; and the govt. recently lowered the interest rate .75 which was unexpected due to the recessionary impact to stimulate growth; all are signs that lead to at least giving them some addl. runway.

Interesting also that Craig's read is possibly Huawei but that will require Canadian govt. regulatory approval and likely may cause a U.S. CFIUS review (Committee on Foreign Investment in the U.S.)as much of Nortel Ltd. U.S. has telecom infrastructure in major US carriers like VZ and AT&T which could be deemed a security risk if controlled by China.

Perhaps the Swedes - Ericsson or Finish Nokia-Siemens would be the two other alternatives in the running given cisco took a pass...

Guess the Krona, Euro or Yuan has better exchange rates than the USD anyways...
Fibre Bundle
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Fibre Bundle,
User Rank: Light Beer
12/5/2012 | 3:25:25 PM
re: Nortel's Not Bankrupt Yet
//Canucks are in for much worse, 70k layoffs last month, at an optimistic 10:1 ratio to the us per capita, imagine if you will if job losses in the US were 700k instead of the 522k. Did you see how canuck currency dropped, wow, talk about optimism.//

Canada has positive net jobs this year. Last month was pretty much the first month of negative job grow. The crunch is finally here though.

The US dollar has been strong against every world currency (except the yen) for the last 5 months because the deleveraging (caused by the credit crisis) has created a temporary demand for US dollars. Deleveraging has also caused the commodities to crash, and the Canadian dollar tends to track the price of oil (Canadian being the largest supplier of fossil fuels to the United States).

Canada still has a current account surplus, and the government budget is still close to being balanced for this fiscal year, trending to small deficits next year. A major stimulus plan is likely coming in January, but compared what is happening in the US and Europe, will be downright modest in comparison.

Canada was pretty much the last man standing in the major Western economies. The banking system was well regulated and apart from flesh wounds, mostly avoided the toxic waste peddled by Wall Street around the world.

There will likely be a mini-housing-crash in the next couple of years, but exotic mortgages were never really allowed in Canada, and neither was the house-as-ATM.

Ontario will be hit the hardest since the automobile industry is a major driver of the economy, and Nortel going BR would be piling on. More of "outer" Canada and many former have-not provinces are in stronger shape than they pretty much have ever been, as BRIC growth has driven resources industries, and BRIC growth will likely spring back a lot sooner than US growth.


nodak
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nodak,
User Rank: Light Beer
12/5/2012 | 3:25:25 PM
re: Nortel's Not Bankrupt Yet
With a market cap of 200M, it does not look like they are going to be able to get much if they do try to sell MEN. They buyer would be better served to do a hostile take over of the company, break off the pieces they want and junk the rest.
inauniversefarfaraway
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inauniversefarfaraway,
User Rank: Light Beer
12/5/2012 | 3:25:25 PM
re: Nortel's Not Bankrupt Yet
Enough cash? We'll see when the filings get submitted. For all we know, these creditors just want to be first in line when this bubble busts. Everybody else: don't worry, be happy. 'Til the other shoe falls

Canuck gov't, largest employer... Just like the auto industry? Was there a bailout we didn't hear about? No! Largest employer, when did this happen?

Canucks are in for much worse, 70k layoffs last month, at an optimistic 10:1 ratio to the us per capita, imagine if you will if job losses in the US were 700k instead of the 522k. Did you see how canuck currency dropped, wow, talk about optimism.

No revisionism please, it wasn't CSCO that turned down Nortel, it's more like the other way around. Over the years, it has always been the same song: when times are good, many companies offered big bucks to Nortel for one or another division, Nortel's position was invariably: "don't call us". The reality is that Nortel doesn't want to be saved, they don't need anybody. They would rather wait until poor management kills any innovation so they can beg or pay someone to take it off their hands.

This is the funniest part of all, the management at Nortel can't be controlled. They can't be bought out because they would infect their host. This is how these kids play, it is cultural. You really have to see it to believe it.

Send me a pair of those rose colored glasses, the marshmallows are getting crispy.

Belzebutt
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Belzebutt,
User Rank: Light Beer
12/5/2012 | 3:25:24 PM
re: Nortel's Not Bankrupt Yet
> Many will agree it was a nice place to work, once upon a time. All that is left is a bunch of cut-throats.


You often hear this from some ex-Nortel people on this board. As soon as you left, it's only the cut-throats who were left. It used to be a nice place to work, but when you left it wasn't. I understand being bitter after you've been laid off or your project was cut, but it's nothing personal. You don't have to insult those of your co-workers who were lucky enough to stay.

Back in 2000 there was lots of dead weight. Not so much anymore. You can't even complain that management is all in-house, all the top management has been replaced with people from outside in the past few years. Middle and lower management is all in-house, but short of massive layoffs and massive hiring there's no way to fix that. What are you going to do, fire managers and employees for being at the company too long?

Sure, your project got cut and maybe you thought it was the flagship product on which the success of the company depended. But innovation is still here, there are more industry-leading down the pipe, some coming real soon.

For a company that has such terrible rep when all the press talks about is how bad financial shape it's in, it's amazing that Nortel was able to maintain a steady 2+ billion in revenue each quarter. There is still waste going on and that has to get fixed, but the company is viable.
paolo.franzoi
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paolo.franzoi,
User Rank: Light Beer
12/5/2012 | 3:25:24 PM
re: Nortel's Not Bankrupt Yet

No, its easier just to buy Nortel Bonds and wait it out. The bonds have amazing yields and when they go bankrupt the bondholders who end up as the senior debt own Nortel.

You could pick up Nortel that way for a song. Even if you don't the bonds are 40% YTM right now. Not a bad ROI.

seven
boozon
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boozon,
User Rank: Light Beer
12/5/2012 | 3:25:23 PM
re: Nortel's Not Bankrupt Yet
"Nortel has spent most of it's time destroying innovation"

Let's just remain in our world of photonics. If eDCO, PBT and 40G PM-QPSK are not innovative what else is?
abashford
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abashford,
User Rank: Light Beer
12/5/2012 | 3:25:23 PM
re: Nortel's Not Bankrupt Yet
As a remaining "cut-throat" I take exception to your comment:

"All that is left is a bunch of cut-throats."

Do you really want to stick with such a sweeping generalization, or do you want to explain yourself?

The only group that has had it worse that NT shareholders in the past 8-10 years are Nortel employees, and the vast majority those are people of strong character and very hard workers. They don't deserve such a comment from the likes of you.
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