Nortel Networks Corp. (NYSE/Toronto: NT) has done better than expected and expects to raise US$1.3B from an offering of equity and common shares this week (see Nortel Offers Shares and Nortel to Raise $1.3B).

Analysts say the sale will raise enough cash to beat back the wolf at the door, but it's come at a price -- serious dilution of Nortel stock. And the new capital is no guarantee that the firm is safe and sound from the telecom depression.

"They needed a very dilutive equity offering to gain liquidity," says Steve Levy of Lehman Brothers. "They've done better than they expected that way. They've eliminated one of our key concerns. But it's been very dilutive."

Levy still hadn't finalized his figures at press time, but one Canadian equity analyst, who asked to remain unnamed, estimates the value of Nortel shares could be diluted by over 30 percent as a result of the transactions.

Nortel has been desperately in need of a cash infusion in order to stay fully funded and within the limits of its credit covenants. The company originally expected to raise $800 million, but analysts say short-selling fund managers, who expect to make a profit by selling shares at greater prices than they'll eventually buy them back for, glommed onto the offering in anticipation that Nortel's stock price will dwindle over time. The result was a better-than-expected showing for the ailing equipment vendor.

Nortel is expected to gain $776 million from the sale of 550 shares of common stock and another $714 million from 25,000 so-called equity units, which can be converted to common shares worth $1.69 apiece within three years. Once charges are taken out, net aggregate proceeds are expected to be $1.3 billion.

The shares were priced yesterday at $1.41 and the equity units at $28,571 apiece.

Nortel's also arranged for an extra "greenshoe option," by which the underwriters can buy another 82.5 million common shares and 3,750 more equity units, if demand is sufficient. Nortel's greenshoe option could add another $200 million to its take.

If the option is filled, the Canadian equity analyst cited earlier estimates that Nortel will have issued 1.2 billion new shares. These will be added to the 3.4 billion fully diluted shares it had at the end of the first quarter of this year. When all calculations are done, the number of Nortel's shares will swell to nearly 4.6 billion, diluting the value of the stock by 34 percent, he maintains.

Bottom line? Nortel's in the clear for now, but the company must improve its revenues and overall financial health before it can be said to have reversed its downward spiral.

"We think the company's funded through the end of 2004, but it's not going to be cash flow positive until after that," predicts the Canadian analyst. He says the company's performance in 2003, particularly in its wireless business, could help turn the tide -- or challenge Nortel even more.

At press time, Nortel shares were trading at $1.51, up $0.10 (7.09%).

— Mary Jander, Senior Editor, Light Reading
http://www.lightreading.com