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Optical/IP

Nortel Takes $2.5B Hit

Nortel Networks Ltd. is on course to take a $2.473 billion charge to settle outstanding class action lawsuits. It would "remove a significant impediment to Nortel's future success and allow Mike Zafirovski and the Nortel team to move forward," the company's chairman Harry Pearce said in a statement this morning.

The company said it has agreed "in principle" to settle the class action lawsuits, brought against Nortel following the accounting scandal that plagued it in 2004 and 2005. (See Nortel Sues Former Executives, Nortel Fires CEO, Canadian Regulator Probes Nortel, SEC Pops In on Nortel, and Nortel Rattles Nerves.)

The news sent the vendor's share price down by 25 cents, nearly 8 percent, to $2.77 in pre-market trading.

To settle the lawsuits, Nortel is proposing to pay $575 million in cash and issue 628,667,750 common shares, equivalent to 14.5 percent of its current outstanding stock. Based on yesterday's closing share price of $3.02, that share issue would be worth $1.898 billion, taking the total charge to $2.473 billion, or $0.57 per share. The charge would be made against the company's fourth quarter of 2005.

At Tuesday's closing price, Nortel's market capitalization was $13.1 billion.

Nortel has until March 16 to file its fourth quarter results. A spokesman says that while no specific date has been set, the company expects to file its financials on time.

Nortel has also agreed to contribute half of any funds recovered in the ongoing litigation against Frank Dunn, Douglas Beatty, and Michael Gollogly -- the former executives "who were terminated for cause" in April 2004. (See Nortel Dismisses Dunn.)

Nortel noted, though, that the "proposed settlement would contain no admission of wrongdoing by the Company or any of the other defendants."

Nortel said the proposed settlement is dependent on it reaching a "global settlement encompassing all pending shareholder class actions and proposed shareholder class actions commenced against the Company and certain other defendants following the Company's announcement of revised financial guidance during 2001, and the Company's revision of its 2003 financial results and restatement of other prior periods." It is also dependent on the "contribution of available insurance, which has yet to be resolved," noted the company.

The move is part of Nortel's attempt to distance itself from accounting issues. It has a new CEO in Zafirovski, who has been appointing new senior executives. The company has also found a route back into the critical broadband access market through its new joint venture with Huawei Technologies Co. Ltd. . (See Nortel's New Faces Face Tough Task and Nortel & Huawei: Broadband Buddies.)

— Ray Le Maistre, International News Editor, Light Reading

paolo.franzoi 12/5/2012 | 4:06:58 AM
re: Nortel Takes $2.5B Hit
Means their shares are worth $3.

After the attorney fees, they might receive $100 out of the settlement. Have to remember that Class Action Lawsuits (in general) are there to provide the Lawyers with money not the victims. If you can get a big enough "class" it is all gravy.

seven
vk_lite 12/5/2012 | 4:06:58 AM
re: Nortel Takes $2.5B Hit So what does this mean to the average shareholder.
Let's say Mr. Blind-Sighted (Mr. B-S) bought 10000 shares a week or a month before the accounting scandals were revealed, at say $6US a share, and now they hover around $3US, and Mr.B-S still holds them, what does this settlement mean for Mr. B-S (assuming they actually go through with this..)?
Metropolitian 12/5/2012 | 4:06:56 AM
re: Nortel Takes $2.5B Hit The proposed settlement is quite unfair to all shareholders. Only 575 million is in cash, which the lawyers will devour promptly. The remainder of the settlement is in Nortel shares (628 million of them), which is of no interest to lawyers (or savy investors) There is about 6.33 billion shares outstanding. This settlement will dilute the value of all existing shares by 9%. This only compounds their ridicously high "dot.com era" PE. Nortel currently has at 500. The settlement will drive the PE to 550.

ironman 12/5/2012 | 4:06:55 AM
re: Nortel Takes $2.5B Hit As a NorTel share suffer, what does this mean to me/us? Does the suit settlement apply to me? It's been so long that I forget if I was part of this settlement. Obviously if I'm not part of the suit it doesn't apply, so how would one know, wait for the mail?

IM
valleyguy 12/5/2012 | 4:06:54 AM
re: Nortel Takes $2.5B Hit When does Nortel close its doors like the countless, stupid little companies trying to get bought by them? They have got to be close to running out of cash, they've done nothing to get into any growth markets, what's his face from Cisco left after three months, chronic management exodus, their stock is in the tank, etc. When does the misery end? It's like watching one of those old Japanese monster flicks, where the thing just flops around, crushing things in its wake, getting shot, burned, hacked, hammered, lurching towards certain death. Them and Lucent both. Ridiculous and tedious. Is any of their misery even newsworthy anymore?
fsubob 12/5/2012 | 4:06:49 AM
re: Nortel Takes $2.5B Hit valley guy are you that stupid. they will be profitable in 2005, will be profitable in 2006. they have made key acquisions, signed strategic agreement with varies manufactures, new worldclass executives running the company. What are you smoking thnking they will go out of business. check there financials, they have nearly $4B cash
fiberous 12/5/2012 | 4:06:42 AM
re: Nortel Takes $2.5B Hit Valleyguy,

There is the Canadian Pride and the Northern
Bell Labs that can come against this fabulous
idea.

How can you even think like this of our
neighbors primary telecom vendor?
Tsk, tsk, where is your sense of naftaism? ;)
fiberous 12/5/2012 | 4:06:42 AM
re: Nortel Takes $2.5B Hit Dear fsubob,

I am amazed at your insight. You are
the only one who has such an uncanny perception!
You must be a VC or one who will finally start
helping them. It is in your destiny given your
knowledge.

They exited 2004 with 4B cash, but took reserves
against this for 1.6B Cash outflow for 2005 and
1.8B in Cash Outflow for 2006 for commitement in
2004. They have been posting operating loss. So,
do the math and figure out how long their
father's assets are going to last.
Especially, as they go into a spending splurge.
Finally, as the headline says "Nortel takes
$2.5 hit."
Is it Canadian pride speaking? Or the cold there?
You better move to the Valley quickly to avoid
permanent damage.
optiplayer 12/5/2012 | 4:06:39 AM
re: Nortel Takes $2.5B Hit While Nortel is by no means completely out of the woods when it comes to liquidity they do appear to have sufficient resources to pay down their near term debt obligations and the proposed $575M cash settlement. Of equal importance, they have returned to having positive operating profit which is the key if they are ever going to achieve a solid turn-around. They also appear to have added some management strength which bodes well for the future though the outlook on current products is mixed at best.

The headline sighted by "fiberous" is misleading as ~80% of the $2.5B hit is in stock. It is massively dilutive to current shareholders but it doesn't impact the liquidity picture.
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