Nortel: Kissing Avaya Goodbya?
The New York Times and Wall Street Journal both reported that Avaya is close to a deal for an estimated $17 per share, which would represent about a 6 percent premium over Friday's closing price and would value the deal at around $8 billion. According to our sources, the deal is likely to be announced after the market's close today.
On Friday, Light Reading, citing unnamed sources, said that the price could be above $20 per share. (See Avaya Close to Deal and Should Nortel Buy Avaya?)
One Wall Street analyst, who asked not to be named, said today that the lower price makes sense: "The price sounds right. $17 is well within the range of what private equity can pay."
According to that analyst, "Nortel can't even reach $17, so why would a private equity group pay more?"
The deal underscores a growing number of private-equity deals for public companies. Just two weeks ago, Alltel was bought by TPG and GS Capital Partners in a deal valued at $27.5 billion. (See Alltel Accepts $27.5B Bid.)
"I think you'll see more private equity investments in public companies. There are not as many startups now, and private equity has to put its money somewhere," says Yankee Group Research Inc. analyst Zeus Kerravala.
Avaya is seen by most as an excellent candidate for a private-equity buyout for several reasons, some of which include its positive cashflow and strong balance sheet.
Analysts say the idea of a private equity buyout is attractive for Avaya. Their reasoning: Avaya's enterprise phone equipment business is predictable; it has an attractive cashflow; and there could be some room for cost savings if it had a more aggressive management that wasn't linked to the legacy Lucent-AT&T business. (Avaya spun out of Lucent in 2000.)
Avaya, too, might flourish if it's not always consumed with pleasing Wall Street. "Avaya is a company in transition," which "may have a better chance as a private company" than as a public one," says Yankee Group's Kerravala.
Other analysts aren't so optimistic and say Avaya's low-growth business may lose marketshare over time. Brean Murray & Co. Inc. analyst Eric Buck says $17 is "pretty rich."
"I'm not sure what a private equity guy could do that they haven't already tried," Buck says, noting Avaya's past restructuring efforts.
Outbid in the deal is Nortel Networks, which some saw as a strategic fit due to the positioning of the companies in the enterprise IP space. But analysts say Nortel may be better off by not having won the auction.
Assuming that Silver Lake and TPG have won Avaya, Heavy Reading analyst Joe McGarvey says, "I think overall it's fortunate for Nortel that it worked out that way."
Avaya holds a 25 percent share of the enterprise phone equipment market, with Nortel holding a 15 percent share. The combination of product portfolios would have created a market leader, surpassing Cisco Systems Inc. (Nasdaq: CSCO), which holds about 25 percent of the market.
Representatives from Avaya, Nortel, and TPG declined to comment on buyout reports. Silver Lake representatives could not be reached for comment.
— Ryan Lawler, Reporter, Light Reading
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