Optical/IP Networks

Avaya Close to Deal

Avaya Inc. is close to being sold next week, in a deal that could be valued at more than $9 billion, a source tells Light Reading.

The finalists in the battle to acquire Avaya come down to two bidders, according to the Wall Street source, who said his information comes from people close to the deal. One of the bidders is Nortel Networks Ltd. , which would offer a mix of cash and stock. The other is a group led by private equity firm Silver Lake Partners , which is approaching Avaya with an all-cash bid.

The source believes that Avaya will be sold by next Wednesday for more than $20 per share, which represents at least a 25 percent premium over the company's current stock price.

Rumors of a possible buyout began soon after Avaya postponed its analyst-day meeting, originally scheduled for May 31, which it has yet to reschedule. (See Should Nortel Buy Avaya?).

Some analysts questioned whether a deal at that price would make sense for a publicly traded company like Nortel.

JP.MorganChase analyst Ehud Gelblum wrote in a research note on Tuesday that "a combo cash + stock deal – which seems the most likely of scenarios – would require somewhere between 11 percent and 18 percent opex cuts for NT to offer a 15 percent premium and still have an accretive deal."

One analyst, speaking off the record, said the price seems "a little steep." Avaya's share price has already been run up by rumors in recent weeks, and a $9 billion valuation nearly matches Nortel's market capitalization.

"You're talking about a company that makes half as much in terms of revenue," for which Nortel would pay almost as much as its own market cap, the analyst said. "That's going to be tough to explain to shareholders."

Earlier this week, Prudential Equity Group LLC analyst Inder Singh said a deal could make sense from a private-equity perspective due to Avaya's positive cashflow. "Avaya turned $1 billion of net debt into $1 billion of net cash" in just a few years, Singh said. Singh had no new comments today on the deal or whether a higher price makes sense.

Yet the source who says the deal is happening believes the combination of a bidding war and the deep pockets of the private-equity world could easily push the deal over $20. "These private equity guys are willing to pay crazy prices to get deals done," says the source. "They don't get paid unless the money is deployed."

Industry analysts, at the same time, see the strategic advantage of combining Nortel and Avaya's powers in the enterprise voice market.

"From a customer base, it would be a tremendous deal, as all of a sudden Cisco is the smaller player," Heavy Reading analyst Joe McGarvey says. "But one and one doesn't always make two."

— Ryan Lawler, Reporter, Light Reading

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