Nortel Issues Damage Report
What's jarring about today's announcements is that they indicate that at least some of Nortel's creditors, faithful to now, are finally losing confidence in the company's ability to turn itself around. And even though Nortel says just three banks have turned tail on them, the gap in trust is likely to prove damaging to Nortel in the long run.
The announcement comes after a period of rising anxiety about the telecom equipment supplier's fortunes. Industry observers had predicted the company would have an earnings shortfall, and the company's debt was downgraded to junk status last week (see Nortel: Dark Rumblings From Ottawa and Moody's Junks Nortel Debt).
Perhaps because everybody had expected the worst, the company's stock rose $0.10 (2.79%) to $3.68 in midday trading. But Nortel shares have lost 40 percent of their value in the last month.
Nortel plans to report about $0.26 net loss per share from continuing operations, including various "acquisition related costs" and charges for ongoing workforce reductions. In total, the company's revenues will be down 16 percent, versus the 10 percent originally anticipated.
The company isn't clarifying much of the detail on the earnings front, saying only that all will be revealed April 18. But it's apparent that layoffs have continued (in line with the company's previously stated plan) and that Nortel continues to suffer the aftershocks of its heyday acquisition mania (see Nortel Shuts Optical Switch Effort and Nortel Buys: Reaping the Whirlwind?). Meanwhile, it seems that customer expenditures still lag.
Nortel says that its predicted results will be in line with the performance guidelines its creditors have stipulated. But three of the 27 banks in Nortel's credit syndicate can't come to an agreement about extending or renewing Nortel's existing credit line -- something that will almost certainly have to happen if the downturn keeps up.
So Nortel has today given notice to the banks that it's drawing on all of its existing credit, as well as activating an associated clause that extends the terms of credit for one year.
"The company does not have an immediate need for these funds," said CEO Frank Dunn in a prepared statement. But he said Nortel will tap its existing credit while it's there, "rather than seeing this source of liquidity eliminated."
What's the upshot? There's talk that Nortel may be a target for acquisition -- rumors that seem to be falling on willing ears, judging by Nortel's stock price. Cisco Systems Inc. (Nasdaq: CSCO) and Alcatel SA (NYSE: ALA; Paris: CGEP:PA) often surface as likely suitors.
For now, though, most analysts are playing their speculations close to the vest, eschewing press calls or predictions of any kind. One thing's guaranteed, though: Investors will be all ears on April 18, when Nortel reveals the next chapter in the ongoing saga.
— Mary Jander, Senior Editor, Light Reading