Avici Systems Inc. (Nasdaq: AVCI; Frankfurt: BVC7) has formed a "strategic relationship" with Nortel Networks Corp. (NYSE/Toronto: NT) based on the resale of Avici's core routers (see Nortel, Avici Announce Partnership).

The deal, hinted at earlier this week by Light Reading (see Nortel/Avici: Getting Together?), includes a three-year agreement in which Nortel will integrate, sell, and support Avici core routers. Avici will be Nortel's "preferred partner" for IP core routers. The partnership is a step beyond the normal reseller agreement, in that Nortel and Avici will perform operations, administration, and maintenance (OA&M) work together, and in that Nortel has warrants, or options, to buy 800,000 shares of Avici stock if the relationship proceeds favorably.

Nortel already owns a stake in Avici amounting to less than 5 percent of the company.

The news sent Avici's share price soaring, up $3.66 (35.05 percent) to $14.10 in early trading. The stock closed Wednesday at $10.44, up 23 percent, or $1.96, from Tuesday's close.

Nortel's share price was up by 20 cents, or about 3.5 percent, in early trading. It had risen steeply Wednesday following news of a deal with Verizon Communications Inc. (NYSE: VZ) (see Nortel Soars on Verizon VOIP Deal).

Under the terms of the agreement, Avici has granted Nortel a warrant to buy 800,000 shares of Avici common stock at $8 per share. The warrant is "exercisable after seven years," but that timescale might be brought forward if Nortel achieves unspecified "performance milestones."

In a conference call announcing the deal, Avici president and CEO Steve Kaufman said the deal will "greatly expand Avici's opportunities with carriers," and that the two vendors have a joint solution ready for operators "from day one."

Nortel's president of wireline networks, Sue Spradley, said in a separate interview with Light Reading that the deal was in part driven by the new opportunities being created by the convergence of voice and data networks using IP and MPLS technology.

"There are a lot of market opportunities and RFPs out on the street," says Spradley. "This is all about the timing of the market. There are a lot of requirements for carriers to put services on the IP/MPLS core. We are taking our sales force and [Avici's] sales force and actively pursuing the deals that are out there. This is a very strategic partnership."

For those who'd like to brush up on this all-important trend, Heavy Reading, Light Reading's independent research arm, last fall published the definitive report on the convergence trend: Setting a Course for Convergence.

Both companies tried to downplay the effect of this deal on their current OEM agreements. Avici has a reseller deal with Huawei Technologies Co. Ltd., and Nortel has a reseller relationship with Juniper Networks Inc. (Nasdaq: JNPR).

"We have an OEM relationship with Huawei, and we will continue that," said Kaufman. That being said, Kaufman gushed that the Nortel relationship is "global in scope and reach."

Despite this posture, it's not likely that Nortel's new partnership will do much to cultivate its relationship with Juniper. In fact, the decline of that relationship over time is likely what drove Nortel to find a partner in Avici.

"We don't sell Juniper in the core today anyway," said Spradley. "It doesn't really have an impact on [our relationship]. We're doing an OA&M relationship with Avici, which is much more strategic." The big question, of course, is whether this deal will lead to Nortel acquiring Avici. That will likely depend on whether the companies have success selling routing products together. Nortel's 800,000 warrants vest over seven years, and the acceleration incentive would allow Nortel to buy another chunk of the company if things go well.

There may, in fact, be one particular RFP on which the partnership is focused in the short term, say sources. Stay tuned.

— Ray Le Maistre, International Editor, Boardwatch, and R. Scott Raynovich, US Editor, Light Reading